Improvements to Corporate Governance the Top Priority for Chinese Financial Reform: Guo Shuqing

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China’s top banking regulator has highlighted improvements to corporate governance levels as a key priority for reform of the financial sector.

In an essay published by Economic Daily on 3 July Guo Shuqing (郭树清), party secretary of the central bank and head of the China Banking and Insurance Regulatory Commission (CBIRC) highlighted the need for strong corporate governance to ensure the effective functioning of financial institutions.

“A large number of financial institutions are strongly characterised by high levels of externality, high financial leverage ratios and information asymmetries,” Guo wrote.

“Only with standardised corporate governance structures will it be possible to form effective self-discipline, and thus establish a market image that obtains the trust of the public, and achieve healthy, sustainable development.”

Guo highlighted a range of existing measures for improving the corporate governance of Chinese financial institutions including:

  1. Diversification of equity structures: “Banking and insurance institutions use multiple channels including share reforms and domestic and overseas listing to introduce private capital and drive the formation of a diversified equity structure with state-owned shareholders, institutional investors and members of the public all holding shares.”
  2. Basic formation of corporate governance institutional frameworks: “General establishment of corporate governance institutional frameworks comprised of shareholders associations, boards of directors, supervisory boards and senior-executives levels as their main constituents.”
  3. A trend towards the standardisation of corporate governance operating mechanisms. “By means of the establishment of a specialist board of directors committee, the optimisation of the board structure, and raising the independence and professionalisation of the board, the status and professional role of boards of directors has gradually been strengthened.”
  4. Continual optimisation of the business development model. “The banking sector has basically established the modern operating concepts of capital restraints, and following adjustments to capital, added-value and risk, capital rates of return are now prioritised and applied at key institutions, vigorously expediting marketisation and standardisation of capital allocation, risk coverage and incentivisation assessment measures.”
  5. Risk management and internal control mechanisms have continued to improve. “The vast majority of banking and insurance institutions have implemented comprehensive risk management strategies and established independent risk management departments.”

Guo also pointed to the need to drive further improvements to corporate governance mechanisms across multiple areas, including:

  1. Fortifying the sovereign repsonsbiliteils of financial enterprises themselves. “Improving corporate governance is the chief duty of financial enterprises for the deepening of reform, and achieving high-quality growth.”
  2. Regulators must make corporate governance the fundamental regulatory requirement. “There is a need for more effective mechanisms to drive corporate governance regulatory work.”
  3. Pragmatic realisation of strengthening of party leadership and party establishment. “Aside from a small number of central financial institutions, the vast majority of banks, insurers and trust institutions have institutional party relations at the local level. We must firstly strengthen party establishment in terms of politics and organisation, to address the weakening of party leadership. Incorporate party leadership into all segments of corporate governance, to ensure the effective and thorough implementation of all policies of the central party.”
  4. Lawfully clean out and standardise financial enterprise equity relations. “Financial regulatory authorities must cooperate with all levels of local government to earnestly and effectively perform reform and rectification work of municipal commercial banks, rural commercial banks and rural credit societies.”
  5. Fully employ the supervisory role of the market, intermediary institutions and various interested parties. “The various entities, intermediary institutions and interested parties of the market are a key force for expediting corporate governance. We must vigorously establish mechanisms and measures for employing this supervisory role.”

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