Economic Development of China - Dissertation Example

Nellis (1999) contends that the effectiveness of privatization in transitional economies depends on the existence of the institutional underpinnings of capitalism. In addition, empirical studies confirm the close relationship between good institutions and economic development (De Long and Shleifer, 1993), Besley, 1995; Knack and Keefer, 1995; Easterly and Levine, 1997, 2003; Acemoglu, Johnson, and Robinson, 2001).On the other hand, Stiglitz (1999) suggests that using "better management contracts" to make state-share holders act like private owners is a better choice in the absence of those institutional underpinnings, a path which has been followed by the Chinese government in the past two decades.

As noted in World Bank (1997) report, "most other countries in transition have turned to systemic, widespread privatization of state owned enterprises" (SOEs). In China, the state or its agents, carry out 'shareholder' functions performed by private owners in market economic systems." Retaining a large portion of state-owned shares in listed companies1, the Chinese government delegates different types of state-share holders to control these state-owned shares. This thesis attempts to examine the governance role of different types of state-share holders in China's listed companies.

China's transition from a central-planned economy to a market-oriented one is special and unique. Chinese government creates its own path of transition rather than just using a "blueprint" or "recipe" from western advisors. Chinese government has been always attempting to privatize its state-owned assets gradually rather than a "big bang" like that undertaken by Russia. The interpretation of the results of this study is subject to four limitations. First, the classification of state-share holders based on their names is not good enough to distinguish GA shareholders and corporate state-share holders perfectly.

For example, most state assets operating companies use the name of "State Assets Operating Company", such as "Jiangsu State Assets Operating Company". But some operating companies, which should be classified as GA shareholders, could use other names and then are classified as corporate state-share holders in this study. Second, corporate state-share holders could have more incentives and means to manage earnings to improve performance through related-party transactions than GA shareholders because they are holding companies (Jian (2003)).

In this study, the potential earnings management through non-operating activities found in Chen and Yuan (2002), such as sales of fixed assets, has been controlled but the earnings management through related-party transactions cannot be controlled. This study also suggests several avenues for future research. While the benefit of corporate state-share holders has been documented in this study, the cost of them (such as insider control problems) cannot be ignored and remains an open question.

More theoretical work is needed to understand the benefit and cost of different types of state-share holders. Another potential area of research is to investigate their incentives to manage earnings for different types of state-share holders.