Chinese regulators have unveiled an action plan that requires banks and insurance companies in the country to improve their corporate governance standards over the next three years, resulting in a positive impact on the wider investment community.

The China Banking and Insurance Regulatory Commission (CBIRC) released the plan last Friday (August 29), outlining steps that institutions have to take in each of the three years between 2020 and 2022 to enhance their corporate governance standards.

Cai Yongmei

It seeks to regulate shareholders’ behaviour better and improve the transparency of shareholding structures. In particular, it encourages investors to make direct enquiries to the institutions.  It will also require institutions to regularly disclose, to the public, shareholders who are involved in illegal actions.

Chinese insurance companies are facing lower investment returns and higher risks due to weak corporate governance. Insurers will be able to make better investment decisions by strengthening their corporate governance, ensuring higher accountability of directors and improved disclosures. This will bode well for their investment performance and risk management practices, Cai Yongmei, Beijing-based partner at international law firm Simmons & Simmons, told AsianInvestor.

Gabriel Wilson-Otto

Weak corporate governance or inadequate internal controls can lead to related-party transactions, aggressive investments or cash management practices that result in value destruction for minority shareholders. Increased transparency, accountability and oversight have the potential to mitigate these risks, Gabriel Wilson-Otto, head of stewardship for Asia-Pacific at BNP Paribas Asset Management, told AsianInvestor.

Smaller insurers in China often lack a clear shareholding structure, resulting in internal power struggles or ownership battles. The plan seeks to bring about a more defined shareholding structure and normalise shareholders’ behaviour, so companies will focus more on the core functions of creating value for shareholders and building robust investment strategies, Nana Li, research and project director for China at Asian Corporate Governance Association, told AsianInvestor.

The paper also outlines steps to curb tunnelling, an illegal business practice where a majority shareholder directs company assets to themselves for personal gain. State-owned banks or insurers usually conduct tunnelling via some special-purpose vehicles, and it is a malpractice that the regulator has been trying to eradicate in recent years.

TRICKLE-DOWN EFFECT

The asset owners’ change in behaviour will have a positive impact on the entire investment community in the country, experts say.

Nana Li

The plan is vital for enhancing corporate governance and transparency of banks and insurers, who could then serve as role models for the rest of the investment community. It sets out high-level principles for achieving these goals. Details about the implementation are expected to be released at a later stage, Li said.

Banks and insurers play a critical role in contributing to economic growth by facilitating access to capital and the management of risk. They are also a large component of the listed market, Wilson-Otto said.

If the initiatives to improve corporate governance practices in the banking and insurance sector are successful, there is the potential for expansion of the initiative to other parts of the economy. There is also the potential for a ‘trickle-down effect’ from banks and insurance companies, as asset owners, to their investees or counterparties, he said.

The action plan can be seen as part of the regulators’ effort to lift environmental, social and governance (ESG) standards in mainland China.

The China Securities and Regulatory Commission, in collaboration with China’s Ministry of Environmental Protection, mandates all listed companies and bond issuers to disclose the ESG risks associated with their operations this year. In July 2018, the Asset Management Association of China (AMAC) proposed guidelines for asset owners in China to evaluate the adoption of ESG principles by external managers better.