Corporate Governance of Chinese Private Enterprises at the Crossroads

Abstract

This paper aims at examining corporate governance practices of China s private enterprises, which have fundamental implications for building a strong private sector in China. Specifically, this paper locates this investigation in the context of economic globalization in which China has been increasingly participating and the country s transition to a market economy.

The primary finding of this paper is that although Chinese private enterprises have outperformed their state-owned counterparts over the past two decades and gradually become more competitive to meet the challenge of globalization, their corporate governance structures have displayed some worrying signs of inefficiency. Main examples of such corporate governance deficiencies include the lock-up pattern of family business and the phenomenon of founder s dictatorship. This paper also points out that although the removal of red hats from many Chinese private enterprises is a significant improvement on their corporate governance structures, the problem of lax internal controls has increasingly become a serious impediment to the future growth of these private firms. In addition, the prevailing bureaucracy-business complex, in which many Chinese private enterprises have stranded themselves, is frequently manifested in the practice of private entrepreneurs paying for a government identity card. This practice has a pervasive negative impact on the building of market basics and a healthy commercial environment in China s localities, and should be curbed effectively before it evolves into a new variety of cronyism, Chinese style.

The paper concludes by proposing future reform strategies for improving the corporate governance regime for Chinese private enterprises, which would emphasize the importance of complementary or supporting reforms in other related areas, including government and administrative reforms.