Stewardship in China is improving even as regulators have not followed suit with other jurisdictions in Asia by introducing a formal code, according to Chris Liu, stewardship analyst at Allianz Global Investors.
Liu cites a number of top-down reforms from regulators including the change introduced last year that reduces the number of independent directorships an individual can hold to three as well as changes to the Company Law that are due to come into force in July this year that reduce the threshold required for shareholder resolutions from 3% to 1% of common shares.
“There have been many regulations or guideline improvements since early 2023. We have the independent director system updates. They require an independent director in China-listed companies to only serve in three companies. That is actually a very stringent rule if you compare it with Europe,” he said.
“If you specifically look at the 3% to 1% rule change, that is quite big. Three percent of a large or mid-cap company in the China A-share market is normally the privilege of onshore investors, the fund houses in China. If you look at 1%, many of the global investors, including us and including our peers in Hong Kong, meet this requirement.
With the reduction in the threshold required to table shareholder resolutions, many market participants have been predicting a flood of ESG-related resolutions from foreign investors during next year’s AGM season in June. However, Liu does not necessarily subscribe to this view, although he does think it will act as a long-term catalyst.
“I don’t have clear expectations that there will be a flurry of environmental or social resolutions on the table of the AGMs next year. But if you look at Japan, the reason why Japan has so many climate shareholder resolutions is because of reforms introduced six or seven years ago,” he said.
“We are beginning to also see Korea having these climate shareholder resolutions. So maybe China will the next market. I’m glad to see the regulator is ready to give more power to minority shareholder to influence the market in some way.”
Lack of stewardship code
Generally, China is viewed as lagging other markets in the region when it comes to stewardship. Its stock market is characterised by a high level of ownership concentration as well as a preponderance of state-owned enterprises (SOEs).
Several market participants have pointed to the absence of a stewardship code as one potential barrier. In many other markets in Asia, there is already a stewardship code in place, for example Hong Kong has the Principles of Ownership Guidance.
Liu does not necessarily see this as a huge obstacle however and points to the fact that China is a far more heterogenous market than other markets that have already introduced stewardship codes, making implementing one more difficult.
“The Insurance Asset Management of China already came out with a consultation, but that in theory would only serve as a guideline to the asset management arm of insurance companies,” he said.
“Who would be leading this stewardship code? In China, you have more market players. I don’t think it’s an obstacle necessarily to introduce a stewardship code but the question is how will it cover the whole market?”
Regarding the other obstacles often cited with regards to stewardship in China, Liu notes that the regulators have made a number of important steps to reform state-owned enterprises (SOEs), notably by placing far more emphasis on long-term results.
“If you look at the recent developments in China, you’ve got a new flavour of SOEs. The central SOEs in China are overseen by SASAC, the regulator from the state level, and if you speak with them, they are already given a key performance indicator (KPI) of how they can promote better market cap.”
“This is one of the KPIs. And although it’s not disclosed to the public, I think in some metrics of how their leaders are rewarded, the KPIs are changing. It used to be more short-term. Now it’s more long-term.”
