The influence of western banks on corporate governance in China

Abstract

This study draws on in-depth qualitative interviews to investigate the variety of institutional forces which influence the adoption of western corporate governance mechanisms in Chinese banks. Following path dependency models of institutional change it was shown that cognitive and normative institutions, including a "who you know" or guanxi credit culture, mean that the practical influence of western banks on corporate governance reforms was perceived to be ineffectual in most cases. Given the failure of western credit-rating systems in the sub-prime crisis, it is likely that this perception will increase in the future. The majority of western actors believed that the main reason Chinese banks seek to co-operate with western institutions was to enhance the legitimacy of the Chinese bank in the global financial environment, ratherthan to actively change existing governance mechanisms. KeywordsBanking, China, Corporate governance, Guanxi, Institutional change, Legitimacy seeking 3 IntroductionThe development of China"s economy has, to date, been driven by its considerable supply of cheap labour and its many and varied production opportunities. Whether or not capital was allocated efficiently has been of little consequence and, until fairly recently, the financial sector has been characterized by state-owned banks lending to state-owned enterprises (SOEs) on the basis of social policy principles rather than profitability and managerial competence (Branstetter, 2007;Cousin, 2007). Yet as China"s economy advances the development of the financial sector is set to become ever more important. Banks cannot indefinitely continue to make huge loans to inefficient enterprises which will never be repaid and many financial institutions remain compromised by the corporate governance problems associated with having the state as both official regulator and principal shareholder (IFC, 2005;Li et al., 2008) That said, the reform of China"s banks is now well underway and the basic methods employed for restructuring have been large capital injections, the setting up of "badbanks" and asset management companies, initial public offerings, partnerships with foreign banks (with the aim of improving management and IT development) and the inclusion of overseas board members to help improve corporate governance (Hu, 2005; Zhang et al., 2006). Some see these moves as part of a broader interest by Chinese officials in developing an economic institutional environment which is more reflective of the international business community (Guthrie, 1998;Wang, 2007). And, at a theoretical level, these adjustments raise some important questions about the nature of institutional change in China"s economic transition, such as whether China 4 will develop its own unique form of corporate governance, or whether it will converge towards the more market-based models commonly found in the west.While the opening of the market to western banks has been seen as a key plank of the reform programme (Huan, 2005;Liu, et al. 2005), at the time of writing, ma...

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