Amid concerns about China’s long-term economic outlook, a new report by Asia Society Northern California and the Rhodium Group highlights a major opportunity for Beijing to lift confidence: upgrading state-owned enterprises (SOEs) corporate governance. Better corporate governance would boost SOE performance and valuation, promote GDP growth broadly, and attract private and international capital. These reforms face serious obstacles, but practical steps are within reach.

The new report “Missing Link: Corporate Governance in China’s State Sector” applies original data and new sources to illuminate how China’s SOEs are governed. It examines state firms in the context of China’s economic and political system, summarizes the past and present of SOE corporate governance, and analyzes key players in China’s government and at the company level—boards of directors, Party committees, and top executives. The report outlines concrete steps forward to advance reform and identifies the obstacles that these efforts face.

“New data on how governance works in China allowed us to investigate how SOEs are evolving and analyze how these companies are operating today. We point to ways Chinese authorities can move forward even in the current political environment,” said Margaret Conley, executive director of Asia Society Northern California.

While corporate governance in Chinese SOEs has made advances over past decades, concerns remain about transparency, the effectiveness of internal monitoring, and the role of political influence.

“SOEs absorb more capital than any other sector in China, and how they run sets the marketplace tone today and in the future. China’s leaders recognize the importance of corporate governance for sustaining growth at home and preparing China’s firms for a new era abroad and open competition. There has never been a better time to show the world where China intends to go,” said lead author Daniel Rosen of Rhodium Group.

The stakes involved in improving SOE corporate governance are high not only for China, but for international investors, joint venture partners, and the growing number of foreign countries where Chinese SOEs operate. Governance reform requires limiting the influence of political forces on corporate behavior, and accepting the trade off between control and efficiency. This will be challenging, since in the short term markets can produce less stable conditions. But any strategy for efficiency and better relations with advanced economies must address this necessity.

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