China's 'Corporatization without Privatization' and the Late Nineteenth Century Roots of a Stubborn Path Dependency.

Author:Howson, Nicholas Calcina


For almost two decades, developed-world academic discourse on "the firm," corporate governance, and corporate and securities law has fixated on the possibility of global "convergence" and the continuing frustration of that possibility because of "path dependence."

On the one side, convergence with respect to firm organization and governance across distinct political, economic, and legal systems seemed assured given agreement on what kind of firm was most economically efficient--efficient in its productive tasks, but also what kind of firm (active in what kind of capital market) offered the best mechanism for the efficient allocation of capital. This, so argued the strongest proponents of convergence, was the Anglo-(US) American "shareholder-oriented" model of firm organization and governance: widely held companies with most or all of their shares publicly traded, featuring complete separation of ownership and management, all regulated by (i) enabling corporate law with a key role ceded to ex post standard-applying common law-style judicial institutions, (1) and (ii) a securities regulatory system focused on mandatory information disclosure and strict prohibitions on insider and manipulative trading. (2) Emphasis on the way to best ensure the efficient allocation of capital allowed for the possibility of slightly weaker convergence but specifically with respect to the world's largest publicly listed companies, or a convergence driven by the shared expectations of the increasingly global capital markets and the impact of the securities law and regulation of those markets on the law of corporate organization and governance. (3) Perhaps the most penetrating vision of convergence identified national systems where functional convergence (sometimes effected simply by contract) might occur, notwithstanding apparently frustrated formal convergence. (4) Informing this side of the debate was a justified questioning of the viability and long term success of organizational and legal transplants from allegedly more mature political, economic, and legal systems (mostly Northern hemisphere Western, but usually including pre-Recession Japan) to "less developed" national systems. (5)

On the other side, academic analysts predicted not convergence, but stubborn and persistent "divergence," resulting from historical developments and political and ideological forces unique to the still-relevant national unit. (6) These path-dependent factors resulted not only in specific, and distinct, firm capital structures and legal and organizational norms, but also in insulation of certain national systems or practices from the global forces identified as the drivers behind hoped-for convergence--mostly the firm and capital allocation efficiency goals described above. (7)

In the almost two decades between the start of the convergence/path-dependency debate and the present day, the globe has witnessed the rise of explicitly corporate behemoths from the People's Republic of China (PRC or China). These PRC-controlled firms, whether domiciled in the PRC "mainland" (8) or outside, now complete the largest initial public offerings (IPOs) and corporate finance transactions in history, dominate listings of the world's largest enterprises by market capitalization and revenues, have shares traded on both PRC exchanges and the major international stock exchanges, and act increasingly beyond China's national borders to acquire control of firms and assets positioned in other national jurisdictions, including many of China's erstwhile tutors in the arts of economic and legal system development.

Superficial analysis--not just from global underwriters managing and hard-selling gargantuan PRC-origin IPOs--has always explicitly trumpeted the PRC's new corporate entities and the corporate governance system within which they are situated as "convergent" in the terms described above. (9) After all, they say, the PRC's corporate firms feature every formal aspect of a "modern" corporation and corporate law system:

* legal personality for the firm;

* perpetual existence of the corporation;

* "owner-shielding" asset partitioning (i.e., limited liability for investor shareholders) coupled with "entity-shielding" asset partitioning (i.e., state-provided rules that protect the firm from the claims of creditors of the firm's investors or other entities in which such shareholders are invested); (10)

* formal separation of ownership (the shareholders) from management (the board of directors);

* centralized management (the board of directors, again) acting pursuant to a simple majority vote;

* indicia of a desirable "shareholder orientation" in the PRC's formal company law and securities regulation, including: a board of directors elected and removed by voting shareholders; officers appointed by a board of directors responsible to the shareholders; corporate fiduciary duties owed to the firm (and its shareholders) by orthodox fiduciaries (directors, supervisory board members, and officers) and even controlling shareholders; corporate law doctrines like "oppression" (to protect minority shareholders) and a corporate derivative action allowing minority shareholders to work around the board in suing breaching fiduciaries on behalf of the firm, etc.;

* free transferability of, often publicly-traded, share capital;

* veil piercing (to protect third party creditors in tort or contract), etc.

At the same time, there has been a good deal of writing by more discerning analysts identifying how the products of China's "corporatization without privatization" established in the political-legal system and corporate governance ecology unique to the post-1978 Reform-era PRC are anything but convergent and have a "Chinese characteristics"-hugging path dependency. (11) That path dependency is often understood as rooted in (i) China's post-1949 political and ideological settlement, or the basic tenets of Mao Zedong's elaboration of Marxist orthodoxy, which requires that ownership of the means of production be firmly vested in "the people" (12) as represented by the Chinese Communist Party (CCP)-controlled state (the PRC Party State), (ii) China's development model--increasingly called "state capitalism" (13)--and (iii) resistance against any alternative path arising from the power and interest of incumbent control parties which actually operate PRC firms.

Yet, even the most discerning analysts have rarely looked further back into history to understand how these same factors shaped China's nineteenth and early twentieth century "firms" and contributed to the same path dependency. (14) It is that underperformed glance into history that is the stimulus for this writing. Said another way, this Article proposes revived consideration of some of China's late nineteenth and early twentieth century firms--not as historical artifacts proving or denying the buds of a pre-Communist industrial capitalism (15) or as exotic curiosities demonstrating how late imperial China failed to understand the power of the British East India Company (16) (they did understand)--but as the precursors of, and in some ways determinative models for, the same massive PRC corporations that now stand astride the world.

Accordingly, this Article proceeds as follows. Part II describes in summary terms the genesis and fruits of the PRC's corporatization without privatization program, emphasizing the political, organizational, and legal ecologies in which China's corporatized SOEs function. Part III focuses on a lesser-known story--aspects of firm organization and governance norms in China from a time before the end of imperial rule in 1911, which have very strong resonance for today's PRC firms established in a radically different political, economic, and historical circumstance and informed by a completely different degree of transnational engagement. Part IV isolates common elements between the two generations of enterprise establishment in China, regardless in many cases of the governing (domestic or transnational) law, the surrounding political legal environment, and the degree of interaction with the world outside of China. This Part demonstrates aspects of firm organization and governance from more than a century ago that reveal the path dependencies working so strongly today in the PRC. Part V concludes with a consideration of the possible trajectory of the PRC and its corporate entities as global actors of great and abiding influence and of whether, in this sphere at least, "law--Chinese or foreign--matters." (17)


    This Part describes one form of the modern PRC enterprise legal person (or group of legal persons) as it (they) exist(s) today. To set up the desired comparison with Chinese firms of yesteryear, this Part must generalize a rather complex picture, but also focus on a particular form of Chinese corporation--the corporatized traditional SOE and its group of affiliated enterprises, the same entities and groups which presently occupy the heights of China's productive economy and not incidentally the global capital markets. (18) Accordingly, this Part mostly neglects the very large number of firms active in China that are not built upon the assets or franchise rights of former SOEs or government departments, small and medium enterprises which have grown from (often local government-owned) "collectively-owned" and "township and village enterprises", and the myriad of other successful enterprises in the Chinese landscape evidencing something closer to "private" rather than public...

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