Corporate governance and firm value: Evidence from Chinese state-controlled listed firms 1. Introduction1.1. Historical development

Since launching its open door policy in 1978, the Chinese government has continued to reform the corporate policies of state-owned enterprises (SOEs) and has improved connections between the state economy and the market economy. As SOEs are a substantial part of the national economy and of government revenue, the Chinese government has gradually privatized SOEs to raise funds for expansions and to increase efficiency. The history of this gradual transformation of Chinese SOEs is summarized in .

Table 1.

The reform process and its results for Chinese SOEs.

Reformation time1978–19851986–19911992–20022003-Present

Main contentDecision-making rights delegated to factory directors who make profits from the SOEsManagement responsibility systemModern corporate system; ‘corporatization’ introduced, reform enacted and laws strengthenedEstablishment of State-owned Assets Supervision and Administration Commission

Expanded management autonomySeparation of ownership and management authorityEnhanced supervision and service of state-owned assets

ResultsPerformance evaluationShort-term performance focusDespite some achievements, ownership of state-owned assets is still an issueEmphasis on the core political role of the Chinese Communist Party in the corporate governance system

No corporate governance system in place; lack of external environment needed for reform.Excessive government administration

Increased corruption

Adopted from .

Most Chinese listed firms were established through the privatization of SOEs. To maintain their dominant position, equity in listed firms is divided into A-shares, B-shares, H-shares, state-owned shares, institutional shares, employee shares and other shares, but only A-, B- and H-shares can be freely traded. A- and B-shares are generally traded on two domestic stock exchanges whereas H-shares are traded on the Hong Kong Stock Exchange. Before the share reform of 2005, state shares could not be traded on any stock exchange (i.e., they were non-tradable shares). illustrates the percentage of state-owned shares from 2001 to 2007. The average percentage of state-owned shares between 2001 and 2005 (before the share reform) was approximately 46.5% of the total shares but the percentage of state-owned shares decreased to 26.9% in 2007.

Table 2.

Share ownership (2001–2007).

2001200220032004200520062007

State-owned shares241,061277,343304,653334,420343,334458,821603,388

Other non-tradable shares99,423106,512111,423122,805128,140350,773610,441

Total non-tradable shares340,484383,855416,076457,25471,474809,5941,213,829

Tradable shares181,317203,690226,770257,718291,477683,0411,033,149

Total shares521,801587,545642,846714,943762,9511,492,6352,246,978

Percentage of state-owned shares46.2%47.2%47.4%46.8%45.0%30.7%26.9%

Unit: Million shares.

Extracted from the China Securities Regulatory Commission, 2008 Almanac of Chinese Listed Companies, – Capital Structure Figures (1992–2007).

Traditional SOEs were initially ideological organizations created as work units (gongzuo danwei) to serve social and political purposes rather than to meet economic objectives. The primary stakeholders of SOEs were public officials, government bureaucrats and top managers appointed to run the SOEs, who enjoyed the same privileges as state cadres (guojia ganbu). Secondary stakeholders were the SOEs’ workers, who expected an ‘iron rice bowl’ (tiefanwan) with cradle-to-grave benefits ( ).

State ownership is widely viewed as, and has been repeatedly demonstrated to be, inefficient (). Both the profit motives and the political motives of government officials have the potential to significantly distort objective policy (). Recognizing these potential problems, the Chinese government has been gradually privatizing its SOEs, either through management buyouts or by going public (i.e., by listing them on the Chinese and Hong Kong stock markets).