The Role of Hong Kong's Financial Regulations in Improving Corporate Governance Standards in China: Lessons from the Panama Papers for Hong Kong

Abstract

Hong Kong contributes to poor corporate governance on the Mainland. Could regulatory reform in Hong Kong help improve corporate governance standards/practices (and thus firm value) on the Mainland? In this paper, we discuss ways to incentivize Mainland firms to improve their corporate governance by adopting numerous market-value increasing reforms in Hong Kong. These include the limited extra-territorial application of corporate governance provisions, changes to the Listing Rules to ‘contract’ for better corporate governance, and incentives to collect better corporate governance data. Other reforms include increasing financial transparency (particularly about corporate ownership and control), reducing financial firms’ incentives to trade in shell corporations, regulating relationships with tax havens, and encouraging the redrafting of China’s 2002 Code of Corporate Governance. We provide 31 recommendations and estimate that these recommendations can increase market values on the Mainland by 7% (or in value of roughly $330 billion), while improving the value-added of Hong Kong’s own incorporation/corporate services companies.