China

The chapter initially highlights historical elements that are presented in five phases: Phase 1 —Beginning of the decentralization of management; Phase 2—Transition period from a planned economy to a market-based economy; and Phase 3—Modernization business system period. Phase 4—Split-Share Structure Reform (SSSR) period; and Phase 5— decentralized equity. Next, the approach concerns the two Chinese stock exchanges, Shanghai and Shenzhen. It also addresses the controlling body—the China Securities Regulatory Commission (CSRC) and corporate and governance rules that were established by the Corporate Governance Code of Publicly Held Companies, which was implemented in 2002. In this point, the Chinese governance code has advanced on several points, according to the OECD analysis; however, the mandatory influence of the party, both in publicly traded and state-owned companies still needs to be improved. In addition, the chapter describes the challenge of separating ownership and management; in the case of China, the difficulty of this separation, in addition to being a challenge for corporate companies, also occurs between the state and companies. The chapter further discusses how the relationship of information asymmetry can create opportunism due to the peculiar characteristics of the Chinese economy. It also addresses funding sources, shareholder rights, boards, and executive compensation. Finally, it presents the accounting system and independent auditing. Since 2007, Chinese Accounting Standards have converged with International Financial Reporting Standards (IFRS) for listed companies. Even so, the high uncertainty of economic policy in China amplifies operational risks and management pressure, while driving demand for independent audits.