IN a move to assess China's governance infrastructure, its regulators have joined hands with the OECD. In December, 2010, a presentation was made by the CSRC, China's financial markets regulator. This report highlighted several improvements in the legal infrastructure in China. For instance, the concept of a conflict of interests (such as occurrs in related-party transactions) has recently been more explicitly defined within China’s corporate law. To improve enforcement, China has also created a special body, the Financial Reporting Council. However, the report notes that lax enforcement of particular regulations, especially in the post-IPO period, remains a weakness.

Interestingly, the report notes generally that there appears to be a lack of understanding of such key concepts as “material transaction”, “fiduciary duty”, “related party”, “and independent board member” among the business community. Lack of qualified and market-experienced candidates among the pool of Board members remains an issue in China, where the passive nature of the shareholder base, paired with a habitual reliance on government bodies to detect and amend wrong-doings have historically tended to foster governance inefficiencies and corrupt practices.

Yet challenges to improving governance standards at Chinese companies also exist beyond the legal and regulatory issues: while Brazil and Russia seek to attract international portfolio investors to meet the vast investment needs of their economies, there is no shortage of domestic capital in China. It is therefore not surprising that the influence of international investors on Chinese companies’ governance is less pronounced. In fact the Chinese government is very careful about letting foreign investors into its domestic stock market. Chinese institutional investors are actively looking for investment opportunities in Brazil and Africa, leaving the bulk of the local trading to Chinese private individuals who constitute approximately 45% of the players on the two mainland stock exchanges. Institutional investors must register with CSRC as qualified foreign investors (QFI), and all QFIs together hold only about 1% of the almost US$4 trillion share market capitalization in China. The main trading platform for international investors looking for China exposure remains in HK and recently more so in Singapore (S-chips). The latter hosts some 150 Chinese companies, out of just over 300 foreign listings.

In 2009 Standard and Poor’s undertook a Transparency and Disclosure study of the 300 top Chinese public companies. With a relatively modest transparency score of 46% (against the Russian companies score of 57.5% in 2010 and Brazil’s Bovespa Index companies of 66% in 2009) Chinese companies on average remain black horses for international investors. Corporate Governance is one of the areas of investor concern. Both of the mainland’s stock exchanges - Shanghai, which hosts the larger, mainly state-owned companies, and the one in Shenzhen, perceived as Chinese NASDAQ with 55% of companies traded there being private innovative industries players - recognize the problem. The listing requirements with respect to governance remain undeniably lax however.