Although China seems to have taken far longer than Western developed nations such as the UK, the U.S., and Germany to create a modern corporate system, the imperial Qing government promulgated as early as 1904 a corporate law that included rules on limited liability and equal treatment of shares. Why then did it take another century for a mature corporate law and governance system to emerge?

Throughout 150 years of corporate evolution in China, the government has to varying degrees played an active and dominant role. It exercised complete control at the start of the late Qing Dynasty (1860-1911) but gradually granted private shareholders more power over management and corporate governance, especially after the defeats in the Opium Wars and the First Sino-Japanese War in the late 19th century. From 1927, the newly established Kuomintang’s Nanjing government, led by Chiang Kai-shek, gradually came to rule the entire nation, signaling the return of bureaucracy and the decline of the bourgeoisie.[1] It then concentrated economic power by nationalizing a majority of industrial and financial firms. With the creation of the People’s Republic of China (PRC) in 1949 came complete government control over the economic sector, followed by the transformation of all state-owned enterprises (SOEs) into corporations. The private sector became important to economic success.

No matter how effectively the market-oriented economy operates today, however, the idea that planning is essential for China’s economic development persists. In particular, the recent worldwide economic recession has led China to adopt a more active macroeconomic stimulus policy to revitalize the domestic economy, which suggests that central planning is still significant in China’s economy.

Nevertheless, it is possible to direct or influence the economy other than by controlling a multitude of large corporations. The government would not necessarily lose control over the national economy or, as it often argues, harm the public interest by giving up control of corporations. It could, in fact, fulfill its economic, political, and social objectives, by, for instance, using economic incentives such as tax policies, financial subsidies, or loans to encourage private companies to enter certain fields or engage in certain activities, with the government using macro-control measures as necessary. As soon as the government stops interfering, the market can perform its role and effectively allocate resources to meet various demands. As for protecting the public interest and curbing market excesses, the government could implement appropriate regulations. The biggest obstacle would be, as prominent Chinese economist Jinglian Wu recently said, that:

Some people, particularly the social and political elites, have tremendous interest in maintaining the old system. If those people with vested interests in the old system cannot regard the interest of the entire society as of primary importance, they will use all kinds of excuses, including political ones, to hinder the progress of reform and restructuring …[2]

Done properly, the elimination of government control over SOEs will not harm the national economy or the public interest. Only people with vested interests in the old SOE system will suffer.[3]

There are, however, significant challenges. For example, the historical absence of private property rights in China has left many Chinese with an insufficient appreciation for the importance of shareholder rights. Even after the establishment of the PRC, shareholders had little role to play in corporate governance, and it has become obvious to many domestic corporate law scholars that shareholders should be entitled to even more rights and protection. Granting them those attributes might further encourage them to participate in the corporate world and improve corporate governance.

In short, history as well as contemporary empirical research tells us that a government-centered model, except under certain specific conditions such as wartime, will generally stifle corporate development. Constant state interference should be strictly restrained in order to allow the market and self-governing shareholders to perform a more active and decisive role in corporate governance and economic activities. The future development of China’s economy will depend on the rapid growth of the corporate sector, which in turn relies more on its autonomy and the market; and such a developing trend will be sustained over a long time with the deepening of reform and globalization. The government should not interfere too much in the development of these corporate sectors, and shareholder protection, particularly minority shareholder protection, should as a result be emphasized in adapting modern corporate governance.

ENDNOTES

[1] Marie-Claire Bergère, The Golden Age of the Chinese Bourgeoisie, 1911–1937 (Cambridge: Cambridge University Press, 1989), p.272.

[2] Jinglian Wu, ‘China’s Economic Reform: Past, Present and Future’ Perspectives, 1/5 (2000).

[3] Another important reason might be for maintaining the ruling status. Given that direct control is held by the state, it will be beneficial for ensuring stability since the government can more easily reallocate or distribute resources, among other things, without having to explain to the public. In contrast, if the state surrenders such direct control, then it has to rely on laws, rules, economic measures etc. to regulate and guide the development as discussed above, all of which calls for explicit supporting reasons and can no longer be manipulated through black-box operations, as they would be exposed to the public. Some earlier actions will not work under the new circumstances, and the existing government will surely encounter more direct and indirect challenges.

This post comes to us from Dr. Min Yan, an assistant professor in business law at Queen Mary University of London and director of the BSc Business with Law program. It is based on his recent article, “Evolution of the Corporation and Shareholders’ Role in China” available here