RIETI Policy Symposium

Corporate Governance from an International Perspective: Diversity or Convergence

Presentation Summary #3

TONG Daochi China Securities Regulatory Commission

The Chinese capital market has a short history. Shanghai and Shenzhen have had capital markets since 1990. It is young but dynamic. Market capitalization is 50% of GDP. China is the third largest market in Asia. There have been over 1,200 companies listed as of 2002, and there are 124 securities companies and over 100,000 practitioners.

China had its own ENRON style corporate scandal in 2001. Since that time, the Chinese market has lost 40% of its value. These events highlight the importance of corporate governance in China. China's legal system follows the continental law (not common law) tradition. It is similar to Germany's in having dual boards. But 59% of all shares are still owned by the state, and 75% of Chinese corporations are state controlled. One problem remains the division of state ownership between different government agencies. But other problems include the lack of fiduciary duties of shareholders, and the lack of long-term incentives for managers. Corporate governance reform should include the following elements: independent directors on boards, the establishment of a code of corporate governance, the fiduciary duty of directors, information disclosure, and legal and accounting reform.

Progress has been made. New regulation mandates that of the directors of listed companies, one-third must be independent. There have been 2,414 independent directors elected as of June 2002: half of them are academics and 30% are from the legal profession. One person cannot hold more than five directorships at a time. The government enforces due diligence. In Beijing and Shanghai, monthly training classes are available for director candidates. Shareholders can sue directors to enforce information disclosure.

Again market capitalization is only 50% of GDP. I would say the capital market has a lot of potential to grow.