Good relations with the state a double-edged sword, Hong Kong research shows!

Why are some Chinese firms nearly crippled by scandals, while others seem to shrug them off?  Are business and government links beneficial – or a poisoned chalice?  Pioneering research by leading academics in Hong Kong reveals that an understanding of how the fortunes of Chinese companies are entwined with the state will be critical for the flow of future investment. With three decades of unprecedented economic growth, China exerts a powerful appeal to foreign investors.  But as the economy makes its transition from a purely state-administered system to one which admits foreign capital and responds to market forces, appreciating how Chinese business operates becomes crucial.

Research undertaken by Prof. T. J. Wong of the CUHK Business School (The Chinese University of Hong Kong) and fellow academics aim to investigate and to explain the sometimes unpredictable results of corporate misconduct, including bribery, financial misappropriation, manipulation of accounts and patronage.  The researchers examined the far reaching effects of some 212 Chinese corporate scandals dating from 1997 to 2005, shedding light on the arcane links between business and government. “This type of work is a way of opening up the black box that is China for the rest of the world to see,” says Prof. T. J. Wong.

In this document the researchers of CUHK recommend:  “Investors should examine a company beyond its accounting performance, which may not reveal the full picture – often legislation around company accounts isn’t followed to the letter.   Potential shareholders should assess ownership, corporate structure, and crucially the political environment in which the company operates.   Knowing how the company is controlled, and by whom, is a crucial indicator of how it might perform in a more market-led environment.  Conflicts of interest can arise between shareholders and management when a company is part-owned or controlled by the state and holds responsibilities beyond making profit.”     To read the entire document click on this link

BIIA comment:  This is sound advice nevertheless given the imperfect regulations concerning credit information and privacy in China may make the examination of companies a hazardous undertaking.  The recent clamp-downs on information companies only illustrates too well that when examining the background of owners, directors, management and their political ‘environment’ can lead to sudden shutdown of the investigating company and the arrest of its management.  For details click on this link.