Crouching Tigers and Hidden Dragons on the Great Wall Street: Decoding the Corporate Goverance of Chinese Commercial Banks

Authors

Yueh-Ping (Alex) Yang

Abstract

As China’s economic influence on the world grows, its system of state capitalism is likewise receiving increasing scrutiny. Behind the state capitalism, China’s banking sector, the “Great Wall Street”—parallel to the “Wall Street” in the United States—plays a fundamental role in financing and supporting China’s economy. Contemporary studies of China’s state capitalism, however, focus mainly on Chinese state-owned enterprises, leaving less attention specific to China’s state-owned banking sector which adopts a rather different corporate governance practice. In this paper, I conduct a comprehensive and critical review of the bank governance practice in China. Statutorily, Chinese commercial banks generally follow corporate governance best practices, including the requirement of independent directors and board sub-committees and the separation between chairpersons and CEOs. In reality, however, the Chinese party-state manages to dominate Chinese commercial banks by shifting the power center to the executive team, capturing power through its appointment and reward system, and separating the ownership from control. External governance mechanisms, such as market competition, bank regulation and supervision, and hostile takeovers, are inadequate to pose an effective constraint on the Chinese party-state. Under this practice, the Chinese party-state dominates Chinese commercial banks in a less visible manner and thus becomes the “Hidden Dragon” behind the Great Wall Street. In contrast, private capital, which is also a significant source of investment, only possesses marginal influence on the operational decision of Chinese commercial banks and thus becomes the “Crouching Tiger” on the Great Wall Street. Based on these observations, this article critically assesses this Crouching-Tiger-Hidden-Dragon model from an agency theory prospective. I identify three special agency problems underlying this model, including the misalignment between the public welfare vis-à-vis party-state’s interest, between the party-state’s interest vis-àvis bank executives’ interest, and between the bank executives’ interest vis-à-vis the banks’ interest. These special agency problems, in turn, account for the current challenges faced by China’s banking sector, including the rising risk exposure, the financial constraint of private sectors, and the lack of business innovation.

First Page

1

Recommended Citation

Yueh-Ping (Alex) Yang, Crouching Tigers and Hidden Dragons on the Great Wall Street: Decoding the Corporate Goverance of Chinese Commercial Banks, 28 Wash. Int’l L.J. 1 (2019).
Available at: https://digitalcommons.law.uw.edu/wilj/vol28/iss1/3