Corporatisation of China's state-owned enterprises and corporate governance

Abstract

This paper reviews the notable Chinese State-Owned Enterprises' (SOEs) low efficiency and shows that the agency problems with SOEs constitutes the characteristics of corporate governance - insiders' control, soft budget constraints, managerial slack and lack of competent managers. It is this corporate governance structure that results in SOEs' inefficiency. The paper further argues that the current corporatisation of SOEs in China through share issue does not improve corporatised SOEs' performance because it has not effectively dealt with the agency problems associated with public ownership, and, therefore, falls short in addressing the critical issue of corporate governance. The creation of an effective corporate governance mechanism requires the development of the country's market-oriented institutions. It is difficult to prescribe what type of governance structure China should adopt, although it is argued that for former SOEs a neo-corporatist approach with a two-tier board structure may have advantage over a neo-liberal approach with a single board. For China, the most important issue is not to find a fixed set of governance models from which to copy, but to develop institutions that are conducive to effective corporate governance.