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Institutional Activism in Corporate Governance: Qualified Foreign Institutional Investors in China

Periodic Reporting for period 1 - IACG-QFIIs (Institutional Activism in Corporate Governance: Qualified Foreign Institutional Investors in China)

Reporting period: 2016-10-04 to 2018-10-03

The problems/issues that have been addressed are: (1) what are the mechanisms of institutional activism in corporate governance with a particular focus on institutional activism in the US, the UK and elsewhere in the EU?; (2) what is the role of Qualified Foreign Institutional Investors (QFIIs) in the governance of Chinese listed companies?; (3) what are the motivations behind QFIIs’ investment in Chinese equities and what is the connection between their investment strategies and their behaviour as shareholders?; (4) what is the correlation between the extent of QFIIs’ shareholdings and the performance of Chinese listed companies?; and (5) what are the implications for policy makers in China in regulating QFIIs, and for QFIIs based in the EU.

This project is important because it addresses a difficult question for Chinese and European regulators: how to encourage QFIIs to engage in institutional activism so as to improve corporate governance in China, whilst keeping the Chinese stock market stable, with manageable volatility. This is an urgent policy issue, given the volatility of the Chinese stock market in recent times.

The overall objective of this timely project is to explore the barriers to, and prospects for, greater activism in corporate governance in China on the part of Qualified Foreign Institutional Investors (QFIIs), especially QFIIs based in the EU.
The works performed in the whole period are three work packages (WP) set out in the project proposal.

WP1: Participating in research training and collecting data necessary to carry out this project. Two goals will be achieved at this stage: (1) the acquisition of additional skills in statistical analysis and (2) the collection of data to carry out this project.” There are no deliverables proposed in WP1. To achieve the goal (1), I attended a series of trainings in acquiring statistical skills such as lectures and workshops in the whole project period. To achieve the goal (2), I did my best to collect data by myself although the University of Sheffield had no access to the Chinese databases I needed. To collect data, I asked my friends in China to help me whenever I needed data in my research.

WP2: Theoretical analysis on QFIIs’ institutional activism that is fundamental to the subsequent empirical study. This stage will be dedicated to a theoretical analysis of (1) the integration of the global capital system and QFIIs’ institutional activism in emerging economies, (2) the mechanisms used for institutional activism, (3) the differentiation of QFIIs’ capacity to engage in activism and (4) the motivation behind and conduct of QFIIs’ investment strategies.” Deliverables proposed in WP2 are three working papers. WP2(1), WP2(2) and WP(3&4) are three working papers that have been completed. Although focused on theoretical analysis, WP2(1), WP2(2) and WP(3&4) are also composed of data analysis. Theoretical analysis focuses not only on intuitional conceptualization but also on mathematic formulization. Data analysis is to take quantitative investigation. This is to check quantitative evidence for verifying theoretical observations. To do this, I managed to overcome the data collection problem. In writing, I was able to familiarise myself with the relevant theories and data, analyse them and write up them as three working papers for academic audiences. I presented WP2(1) at two international conferences. At the 28th CEA (UK) and 9th CEA (Europe) Annual Conference 2017 at the University of Manchester in the UK, Palgrave Macmillan contacted me for the possibility of publishing the results of my research project as a monograph or a book. I discussed the possibility with them. WP2(2) was submitted to Capital Markets Law Journal (CMLJ), a peer-reviewed international journal. It is now in the process of production and is forthcoming in Issue 1, 2019 of the CMLJ. When working on WP2(2), I took a data collection trip to China. Data collected were used in working on WP2(2) and WP2(3&4). I conducted data analysis in the UK after my return from China. WP2(3&4) was completed as a working paper but edited as Part 4 of a monograph after Palgrave MacMillan has signed a publication contract with me in February 2018. Due to the publication contract with Palgrave Macmillan, WP2(3&4) has not been submitted to any conferences and journals because they will form part of my monograph.

WP3: An empirical study of the correlation between QFIIs’ stock acquisition and firm performance. This stage will empirically test the impact of QFIIs’ stock acquisition on the price trajectory of their portfolio companies’ stocks.” The deliverable proposed in WP3 is a working paper. WP3 is an empirical study and has been completed as Part 5 of the monograph as mentioned above in 1.2.2. To be able to conduct this empirical study, I took a second data collection trip to China in July 2018. Works on WP3 have still been done in the UK. I did data sorting and cleaning, performed data analysis, carried out hypothesis test, took on analysis and discussion on test results, and finally identified and generalised findings from test results. For the same sake as WP2(3&4), WP3 has also not been submitted to any conferences and journals.
Progress beyond the state of the art is to identify ways of increasing shareholder engagement, especially institutional investors from Europe, in corporate governance in China in light of empirical evidence as to their behaviour. This is one of three key objectives highlighted by European Commission’s 2002 Action Plan, which operates on the premise that “Effective, sustainable shareholder engagement is one of the cornerstones of listed companies’ corporate governance model”.

The outputs from this project are an article forthcoming in the Issue 1 2019 of Capital Markets Law Journal, and a monograph to be published by Palgrave Macmillan in September 2019.

The potential impacts of this project arise from the suggestions made for policy-makers in China and Europe to harness the potential of QFIIs in China. To harness the potential of QFIIs is to encourage QFIIs to engage in activism. From a socio-economic point of view, the process of engaging QFIIs in activism in China may progressively liberalize the Chinese stock market and improve the corporate governance of Chinese listed companies. This is because the Chinese stock market is not a completely liberalised stock market and regulatory barriers to QFIIs’ institutional activism still exist. From a wider societal point of view, to engage QFIIs in activism in China may encourage QFIIs to pursue value investment rather than speculative investment in their equity investment strategy. This may guide QFIIs to hold stocks on a medium- or long-term basis, which will not only reduce market fluctuation but also improve market liquidity in the Chinese stock market.
The project does not currently have any scientific publication.

The expected results of this project are an article forthcoming in the Issue 1 2019 of Capital Markets Law Journal, and a monograph to be published by Palgrave Macmillan in September 2019.