Euromoney guides, June 2009

To understand corporate governance in China you first have to understand the nature of Chinese companies. China is still in the relatively early stages of privatisation of its major assets after decades in the hands of the state, and while the landscape has been completely transformed in recent years, the state still has a greater degree of ownership in blue chip companies than is the case in the west.

There are essentially three types of ownership structure in China.

• Wholly state-owned enterprises. This is how all Chinese enterprises looked before China started to open its doors to the world in 1979, but few of note still do: since privatisation and public listing of enterprises began in the late 1980s, many of the biggest corporate names have at least some public listing. One of the most prominent examples of a wholly state-owned enterprise in China today is the China Development Bank, a major policy bank under the direct jurisdiction of the State Council, and the only bank with a full minister as governor. Another is State Grid Corporation of China, while others – such as China National Offshore Oil Corporation – are wholly state-owned at the parent level but have listed subsidiaries.
• Listed state-owned enterprises. These are of greater interest to foreign investors, and they represent the largest part of the market – roughly 70% of Chinese listed stocks are controlled by a government of some sort, be it central, local or some quasi-governmental institution. People differ on their definitions, though. Some consider state-owned companies as those that report directly to the central government – that figure is about 150. Adding subsidiaries of those companies, or others owned by provincial and municipal governments, or with the state as a significant shareholder, adds many hundreds more. Big listed state-owned enterprises include three of the big four banks (Bank of China, China Construction Bank, and Industrial and Commercial Bank of China – soon to be joined by the fourth, Agricultural Bank of China), as well as resource companies and telcos. All of these biggest names are also listed outside China, typically in Hong Kong and often also in New York through American Depositary Receipt programmes.
• Private enterprises. These generally refer to those companies in which the state is not the majority shareholder. Typically they have been built by entrepreneurs and generally one person, or perhaps a family, is the controlling shareholder. The most well-known private company in China, with no state ownership, is probably the insurer Ping An.

The distinctions between state-owned and private companies are becoming less clear. “As the Chinese economy evolves, it is no longer so easy or desirable to pigeonhole state-owned enterprises,” argues Jonathan Woetzel, a director at McKinsey in Shanghai. “The line between them and private-sector companies has blurred considerably. Over the next five years, as the economy and business climate continue to shift, the ownership structure of state-owned companies will matter much less than the degree of openness they show in their business practices and management – that is, their transparency and receptiveness to new ideas.”

It’s also outdated thinking to assume that a company that has evolved out of the private sector will have automatically have more dynamic or sophisticated management than one with heavy state ownership.  “A company’s ownership structure is no longer a legitimate test of its merit,” says Woetzel. “Lenovo and the chemical producer China National BlueStar, a subsidiary of China National Chemical (ChemChina), for example, both have significant state shareholdings but are nonetheless valuable partners for suppliers and customers, as well as astute managers. And in China as everywhere else, private-sector ownership is no guarantee of success: D’Long International Strategic Investment, one of China’s largest private-sector conglomerates, had to be rescued from the brink of collapse in 2004, when the state intervened.”

Besides, the model of heavy state ownership in national companies is hardly unusual, even in the west. Jenny Shipley is an independent non-executive director at China Construction Bank and is also the former prime minister, and before that minister of state owned enterprises, of New Zealand; she has been closely involved in the privatisation of New Zealand’s companies. “You couldn’t single out China in that respect,” she says. “This bank [CCB] does have significant shareholding in terms of the government interest, and directors who represent that interest are on the board. But from my point of view I don’t feel constrained by that at all: the boards act democratically and the majority view prevails in the end. Sometimes it’s made clear what the public line is but that doesn’t stop these things being properly explored.”

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