In any event, improving corporate governance standards at Chinese listed companies may also help build the capital markets into a far greater source of capital than they have previously been. “If you look at the history of China’s economic growth, the capital market does not play a very important role in terms of funding, and in term of its impact on the real economy,” says Qiao Liu at Hong Kong University. “The banking sector has been a lot more important.” Greater investor confidence in governance could reverse that trend and in turn help companies raise capital.

There is a social dimension to it too. Chinese markets are widely participated in by ordinary retail investors. “Up to the end of 2007 there were more than 100 million accounts trading stocks on the Shanghai or Shenzhen exchanges,” he says. “If you have lousy corporate governance practices, and scandals and the stock market not performing well, that would have negative consequences affecting society. This is one of the major reasons the government wants to take this very seriously.”

Does good corporate governance work in China? One useful indication is the CG Watch publication produced occasionally by CLSA and the Asian Corporate Governance Association. Among other things, it devises a so-called Qarp basket made up of companies with higher-than-average standards of corporate governance, and then measures how it performed against the broader benchmark; when CLSA last produced this survey in 2007, it was able to demonstrate the Qarp basket outperformed the MSCI index by 160%, although it will be interesting to see the results when CLSA embarks upon its next study later this year, which will reflect how firms with good corporate governance fared in more volatile market conditions.

The verdict for most China observers is that things are moving fast in the right direction but that patience is required. “If you look at what has been happening in the last eight years, we should give the regulatory authority some credit,” says Qiao Liu. “The level of transparency has indeed improved. But if you compare to standards in the US and European Union, China is still lagging.”

“It’s not just an issue of corporate governance but the overall institutional environment, and public governance,” he says. “To improve corporate governance you also have to improve the overall institutional level – legal, enforcement – and that takes time.”

This article was one of several chapters in a Euromoney guide to corporate governance in China.

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