Corporate Governance in Banking and Economic Performance - Future Options for People’s Republic of China

Abstract

Enhancing the corporate governance of banks in PRC requires looking at the overarching progress of the transition to a market economy. The landscape of the Chinese economic structure has been transformed after a quarter century of economic reform. As it stands now, 70 per cent of GDP is contributed by the non-state sector, where a major wave of new unfettered capitalists emerged. Nevertheless, the continued involvement of the government has created severe agency problems, particularly through the sick relationship between State Owned Enterprises (SOEs) and State Owned Commercial Banks (SOCBs), two segments of the Chinese economy where the gradualist approach didn’t fasten adequate structural adjustment thus loading unbearable amounts of NPLs at banks. The role of the government in the economy will have to evolve from the previous “owner and player” in the economy to that of “rule-setter and regulator”. To reflect this reality, political interference in the banking sector should be cut off. We argue that ownership diversification represents an effective first step in the direction of improving the corporate governance of banks in PRC with the long-term goal of reducing the ownership role of the central government in the banking sector.