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.
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It’s also outdated thinking to assume that a company that has evolved out of the private sector will have automatically have more dynamic or sophisticated management than one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.”