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ALI FARHOOMAND

BUSINESS CORRUPTION IN CHINA

China started its economic reform in 1978 in an attempt to develop a modern corporate sector, raise productivity and accelerate economic growth. The formulation of a "socialist market economy," ratified by the National People's Congress in 1993, called for a transformation of the centrally planned economic system, especially the state-owned enterprises ("SOEs"), into open, global businesses. Not surprisingly, in the absence of an adequate legal framework and a culture of corporate governance, the transformation process has been marred by endemic corruption.

This research note provides an overview of business corruption in China, placing it in a context that takes into account various political, economic, legal and cultural elements. More specifically, it examines corporate ownership and structure in China, identifies sources of corruption, and analyses the impact of corruption on the country's social and economic stability. The note closes with a set of recommendations for countering business corruption in China.

Corporate Ownership and Structure in China

Following widespread embrace of the values of a socialist market economy, it was decided in 1997 by the 15th National Congress of the Communist Party of China that the reform to a modern enterprise system should be accelerated. This was enacted through transformation of large and medium SOEs into corporations because their present structure was believed to have hindered China's economic performance.1 The ownership rights of SOEs were exercised by administrative departments of different levels of government, which meant that the true owners of SOEs, ie, the state or "the people as a whole", had no opportunity to use stock market mechanisms or to have a real presence in the decision-making organ, resulting in a system of governance that was impotent by modern corporate standards.2
1 Wei, Yuwa (2003) "An Overview of Corporate Governance in China", Syracuse Journal of International Law and Commerce, 30(1): 23-48.
2 Ibid. The mechanism of modern corporate governance where shareholders with limited liability are the principals and the board and management of the company act as their agents remains the orthodoxy of their legal form.
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