Taming China's corporate 'wild west'

By Elaine Kurtenbach
Associated Press

HONG KONG — Mainland Chinese corporations raised in a twilight zone of vague regulations and personal ties are facing closer scrutiny now that Beijing is part of the World Trade Organization.

Call it corporate culture shock.

Since China gained formal WTO acceptance in November, Beijing has been churning out new laws, guidelines and legal opinions by the dozens, rushing to bring local laws and practices in line with international standards.

Homegrown companies that thrived in China's corporate "wild west" are being taken to task for practices that have been tolerated in China but that are frowned on or downright illegal elsewhere.

The stock-market watchdog, the Chinese Securities Regulatory Commission, recently censured household appliance giant Guangdong Kelon Electrical Holdings Co., for a number of infringements, including neglecting to register its main trademarks, failing to keep board meeting minutes or review directors' pay and not providing enough detail in the company's annual reports.

The company passed a board resolution pledging to fix those infringements.

"Many managers in Chinese companies don't pay enough attention to rules and procedures. They don't realize they are there for a very important purpose," said Andy Xie, chief economist at Morgan Stanley Asia Ltd.

Guangxia Yinchuan Industry Co., a maker of chemicals, pharmaceuticals, herbal medicines and wines based in northwestern China's impoverished Ningxia region, was caught providing false export and production figures and financial information. The company, listed on the Shenzhen Stock Exchange, had been considered one of the market's most profitable.

A study of 320 companies released by the Ministry of Finance found one in 10 had reported profits in 2000 when they actually had losses. Scores of companies had reported false assets worth $891 million.

Local corporations have been operating in a regulatory vacuum until now. Only recently were rules enacted that require companies listed on China's two stock exchanges, in Shenzhen and Shanghai, to include independent directors on their boards, publish quarterly results and meet other corporate governance standards.

Such provisions, standard in the West, could help curb insider trading and other abuses.

Last month, China published draft rules making company officials liable for investor losses suffered due to false or misleading company statements or for failing to disclose changes in shareholder structure.

But securities analysts say much more change is needed.

"They have been doing a lot, but arguably it's not enough," said Tina So, executive director of Schroders Investment Management in Hong Kong. "The most important thing for the regulators is to build sustainable, sufficient confidence in the system."

Among other new regulations announced recently:

• New rules on closing down troubled financial institutions, according to the state-run Xinhua News Agency, put first priority on repaying lost savings of individual depositors.
• Tighter rules for brokerages ban the often-used ploy of promising specific returns and require that quarterly performance reports be sent to clients.
• New delisting rules abolish a murky, one-year grace period for perennial money losers and require the immediate suspension of trading in shares in a company with three straight years of losses. The company must return to profitability within six months or lose its listing.

It's all part of a long process of adapting China's corporate culture to world standards, and of building trust in financial markets that will play a crucial role in financing restructuring industries.

"The only way to instill confidence is to improve corporate governance," said Bing Ho, chief representative for the law firm Baker & McKenzie in Beijing.

Ho warned it's likely to be a rocky transition. Even finding independent directors qualified to serve on corporate boards could prove difficult.

"The universe of qualified people is not that large," he said.