An analysis of the agency problem in soes of china

Communist Party opened door for private entrepreneurs New State Assets Management Commission established Proposed constitutional amendment backs private property Constitution amended to back private property Expansion of SOE Autonomy and Fiscal Decentralization China started economic reform in industry 4 with the initiatives of expanding SOE autonomy and promoting incentives, aiming at improving the operation of SOEs 5.

An analysis of the agency problem in soes of china

How to Write a Summary of an Article? As long as the interests between the owner and management are not aligned, the conflict is existed.

We find it is not enough to overcome the problem. China has undergone a long period economic reform. During the reform, how to improve the SOEs performance is a hot focus. There are no clear boundary on the space of freedom and responsibilities. Now China has tried a lot of methods to establish the modern organization of SOEs.

The boundary between the government and the executives of SOEs has been clearly set. Some SOES have been published.

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Agent is the entity where Management represents owners; the agency relationship is the relationship between the principal and the agent, in which the agency acts for the principal.

And what is agency problem? The agency problem results from the separation of management and the ownership of the firm. Agency problem can be clarified as the followings: Agents may consume excessive perks.

Agents may shirk not expend their best efforts. Agents may act in their best interest instead of the interest of the principal. On the very beginning, most firms were based on the family and their management was the members within the family, and there was not agency problem at all, because the management and ownership were aligned, no interest conflict.

As the firms grow, it seems they need high management skills and the existed relationship within the management restricted the growth of the firms.

Furthermore, it was much more difficult to raise new equity.

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Then they hired the professional managers to act as the owners. The agency problem is followed as this organization comes out. Due to the interest is not alignment between the managers and the owners, more or less the managers will pursuit their own profit instead of the owners, which we thought is unethical because of the space of freedom and responsibility are not matched.

For example, a firm maybe runs by the professional managers who have little or no ownership in the firm. Because of this separation of the decision-makers and owners, managers may make decisions that are not in line with the goal of maximization of shareholder wealth.

They may approach work less energetically and attempt to benefit themselves in terms of salary and perquisites at the expense of shareholders. There are the monitoring costs, bonding costs and the residual loss. Monitoring costs are costs incurred by the principle to monitor the actions of the agents Ex.

Annual report to shareholders. Bonding costs are costs incurred by the agent to ensure they will act in the best interests of the principals binding employment contract. We will spend considerable time in monitoring managers and trying to align their interests with shareholders. The interests of managers and shareholders can be aligned by establishing management stock options, bonuses, and perquisites that are directly tired to how closely their decisions coincide with the interest of shareholders.

The agency problem will persist unless an incentive structures set up that aligns the interests of managers and shareholders.

In other words, what is good for shareholders must also be good for managers. If that is not the case, managers will make decisions in their best interest rather than maximizing shareholder wealth.

A high level of compensation can result from a pay-for-performance system in which the executive has performed extremely well, or it can be the result of the agency problem, Where the executive is taking advantage of the system.

So it is essential to establish a good controlling and monitoring system, but since it does not work so well or we have not find a perfect mechanical system to prevent it up to now.

An analysis of the agency problem in soes of china

How should we do then? The problem is that each of us has his or her own set of values, which forms the basis for our personal judgments about what is the right thing to do. These dilemmas generally arise when some individual behavior is ground to be at odds with the wishes of a large portion of the population, even though the behavior is not prohibited within law.model of corporate governance for China in this transitional stage of its economic documented agency problem points to the opportunities that abound for managers to self-serve an essential element of corporate governance is the protection of investor interests.

Many SOEs in China are losing money and continue to be a significant burden. China’s SOEs and the Managerial Labor Market Before the s, the Chinese SOE was the lowest link in the chain of command of a central planning machinery. In China, the private sector has long provided more employment opportunities for Chinese people than SOEs.

According to official statistics for , SOEs accounted for only percent of industrial jobs, compared to percent for the private sector. component of China’s economy, SOEs aggregately account for 30% of the country’s GDP and about 90% of all publicly listed firms, and play a central role in industries such as energy, steel, machinery and national defence (Li & Putterman, ).Therefore.

The analysis results can provide scien - reform, especially thereform for executives in Chinese state -owned enterprises (SOEs). Prior to the reform, China implemented a simple, rigid, and universal compensation system in which SOEs were not allowed to keep The detachment of operating rights and ownership incurs so-called agency problem.

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