Where Guanxi Matters: The Modern Chinese Financial Sector

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China’s Evolving Financial Sector and Its Global Importance

China’s financial services sector has experienced burgeoning growth in the past two decades. Hong Kong and Shanghai rank among the top 10 Global Financial Centres in 2023, according to the Global Financial Centres Index 33. By the end of 2022, the country’s financial institutions had a total of 419.64 trillion yuan in assets, increasing 9.9 percent year on year. Among them, banking institutions had assets worth 379.39 trillion yuan, which increased by 10 percent compared to the previous year.

#CUHKWhitePaperSeries | Where Guanxi Matters: The Modern Chinese Financial Sector

Coinciding with the rapid capital market development, initial public offering (IPO) activity has also risen sharply. PwC’s Global IPO Watch 2022 reported the total amount of funds raised through IPOs in China’s domestic markets constituted about 39% of the global proceeds last year, replacing the U.S. as the world’s number one in terms of IPO proceeds for the first time.

Vibrant as other developed markets may be, China’s financial industry is shaped by one important factor that makes it unique like no others in the world. Guanxi, a Chinese social concept of interpersonal connections with implications for the exchange of favours, has long been dominating the Chinese socioeconomic landscape. Previous studies define that guanxi connections are characterised by trust in family-like relationships and instrumental exchanges that run alongside affective bonds. Business networking in the West carries no such elements. In the realm of finance, guanxi often plays a considerable role in shaping the behaviours of economic agents. While this purposeful networking behaviour has potential benefits, it can also bring undesirable consequences.

In this Chinese University of Hong Kong (CUHK) Business School White Paper, we conducted a series of studies into how the guanxi culture has led to the development of a unique financial sector in China and examined the impact of guanxi between different actors in China’s financial sector.

First, we look at how social ties between fund managers and analysts affect their behaviours and business decisions, and how they reciprocate the benefits they receive from each other. We then ask whether guanxi connections between investment bankers and auditors affect the IPO process and firms’ post-IPO performance. The third type of guanxi ties we discuss are those between auditors and audit committees. What negative implications and benefits do such ties bring? In what way can they undermine audit quality? Fourth, we look at how guanxi ties between financial analysts and firm management affect the acquisition and dissemination of bad news surrounding problematic firms. Lastly, we highlight the implications of our findings.

To find out more about a specific topic, click on the links below to navigate to the relevant chapter:

INTRODUCTION – Where Guanxi Matters: The Modern Chinese Financial Sector

PART I – The Influence of Guanxi on the Fund Manager-Analyst Relationship

PART II – Does Guanxi Affect the IPO Process in China?

PART III – Guanxi and Auditing

PART IV – Can Guanxi Help Analysts to Uncover Bad News?

CONCLUSION – How to Counter Negative Effects of Guanxi Ties in Financial Sector?