- Has the QFII Scheme Strengthened Corporate Governance in China?
Corporate governance in China has had a difficult journey since the economy opened up in the late 70s and made the gradual transition from a centrally planned economy to a market economy. In the 90s, with the establishment of the Shanghai and the Shenzhen stock exchanges and the promulgation of the Companies Law, corporate governance came into vogue. Then, following the Asian Financial Crisis in 1997/98, corporate governance assumed greater importance.
The China Securities Regulatory Commission (CSRC) is the main regulatory body for listed entities and it was set up in 1992. Over the last 17 years, it has attempted to institute good corporate governance including transparency, information disclosure, protection of minority shareholders' interests and rules for the appointment of independent directors.
In an attempt to improve corporate governance in China's listed companies, the CSRC established the Qualified Foreign Institutional Investor (QFII) scheme reasoning that the presence of foreign institutional investors on the register of shareholders would help improve corporate governance in the Chinese companies they invest in. This article seeks to answer whether the QFII scheme has in fact strengthened corporate governance in the Chinese listed entities.
The Qualified Foreign Institutional Investor (QFII) Scheme
The QFII scheme was conceived by the CSRC and modelled after the QFII scheme adopted by Taiwan in 1991.1 Improved corporate governance was a [End Page 353] major objective. According to Ferguson and McGuinness, "the QFII scheme carries tremendous potential as a vehicle for raising corporate governance standards".2 Steven Yeo states that "with the advent of foreign institutional investors in the PRC market, with their more robust due diligence and investment disciplines, it is anticipated that the QFII Provisional Measures will further encourage greater transparency and improve the compliance and corporate governance process of A share companies …."3 Fred Hu opines that "the participation of global investors in China's domestic securities market has introduced professional funds management expertise and provided a new advocate for improving corporate governance ….4 This view was further echoed by Richard Ward, Chairman of UBS Warburg who remarked on 26 November 2002 "that QFII will be an important stimulus for improving corporate governance in China because increasingly Mainland companies will be benchmarked against their international peers".5
It was the hope of the CSRC that the QFII scheme would contribute to better corporate governance. The Director General of the CSRC stated at a seminar in Hong Kong on 8 November 2002 that with the promulgation of the QFII scheme, "foreign institutional investors would be able to play a positive role in improving corporate governance in China". It was presumed by the CSRC that the QFII participants, all of whom would be from countries with well regulated financial systems, would require sound corporate governance in their target companies to justify their long term investment horizons.
This article seeks to ascertain what areas of corporate governance were impacted after some five years of operations. Specifically, how did QFIIs impact shareholders, management, board of directors and market discipline? [End Page 354]
The QFII Scheme — Rules and Regulations
The legal basis for the QFII scheme is laid out in the "Provisional Measure on Domestic Securities Investments by Qualified Foreign Institutional Investors — Decree No. 12 of 5 November 2002. The objectives as stated in Article 1 are twofold:6
(i). To govern Qualified Foreign Institutional Investors' investments in China's securities market7 and
(ii). To promote development of China's securities market8
What can QFII invest in? Article 18 of the Provisional Measure states that the QFII can invest in the following RMB financial instruments:
(i). Shares listed in China's stock exchanges (excluding B shares)
(ii). Treasuries listed in China's stock exchanges
(iii). Convertible bonds and enterprise bonds listed in China's stock exchanges and
(iv). Other financial instruments as approved by CSRC
Conditions of the Scheme
The rules are very clear. Only the very large foreign financial institutions need apply for fund managers, they must have assets in excess of US$10 billion during the most recent accounting year and have operated for over five years. Insurance companies must have assets...