Following China entered the World Trade Organisation in November 2001, attention has been paid worldwide to the current Chinese legal system, political policies, and the development of economic reform. Recent debates on corporate governance in China have become a global topic of interest. The corporate governance reform is now the centre of the enterprise reform. This paper evaluates the development of corporate governance reform in China and identifies its changes in legislation on corporate control. This paper provides evidence to show that China has been making significant progress in the development of corporate governance reform. It concludes that China has established a fundamental legal framework for corporate governance. The changes in regulations on corporate control indicate that the development of a more sophisticated corporate governance system is under way. However, corporate governance reform in China is still at an early stage of development. The existing problems are still significant. Laws and legal institutions have experienced difficulties keeping up with the changes that have been taking place in China. The rights of selecting management of state‐owned enterprise still remain in the hands of the state. The reform of the banking system lags behind the development of the market economy and state‐owned banks are still under government's control. The paper argues that in Chinese context as far as the rights of selecting management remain in state's hand, the independent board of directors will have less power to achieve the goals in corporate control. Thus the agency problems will not be solved, and it is very difficult to excise and protect minority shareholders' interest. In today's Chinese market the corporate governance cannot provide the protection of minority investors' interests. This paper also argues that it is very dangerous for individual investors to invest in the Chinese market and they have to bear higher risks. This paper suggests that increasing the Sophistication of the corporate governance system of both internal and external control is the key for the Chinese market. This is because the Chinese context is very complicated. There are so many regulations and laws applied in business practice. Different companies and enterprises apply different laws. This paper points out when a national corporate governance system is established it should serve the whole economic market. Thus the further reform of state‐owned enterprises and also the banking system should take place so that China can build up a real economic market structure according to international regulations. This paper also suggests that in the long‐term, building up a cultural background for applying corporate governance system is very important in Chinese society. Improving the culture in the social environment could help to improve the corporate governance in business practices.
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