Business Daily Media

Men's Weekly

.

China Business Knowledge White Paper Series - Where Guanxi Matters: The Modern Chinese Financial Sector

Prof. Wu Donghui and Prof. George Yang, School of Accountancy at CUHK Business School

HONG KONG SAR - Media OutReach - 29 November 2023 - 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 (around US$57.57 trillion) in assets, increasing 9.9 percent year on year.

In China, guanxi often plays a considerable role in shaping the behaviours of economic agents.
In China, guanxi often plays a considerable role in shaping the behaviours of economic agents.

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 its 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.

Fund Managers and Analysts Reciprocate Benefits

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. Financial analysts are important information intermediaries who provide useful market information and insights into financial data for identifying opportunities, ultimately influencing investors' decisions. Fund managers rely particularly heavily on financial analysts for information.

We found that fund managers are more likely to obtain more support from analysts with whom they have guanxi ties, more likely to hold stocks covered by those analysts, and make higher abnormal returns from the connected holdings. To reciprocate the benefits received from their connected analysts, fund managers are more likely to vote in favour of the analysts in star analyst elections.

Does Guanxi Affect the IPO Process?

We then ask whether guanxi connections between investment bankers and auditors affect the IPO process and firms' post-IPO performance. When firms conduct IPOs, they appoint investment banks and audit firms to certify information disclosed to investors. During the process, bankers and auditors interact with each other. The need for close collaboration between the two could provide a fertile ground for social ties to deepen.

Our study found that guanxi connections increase the likelihood that bankers and auditors participate in the same IPO deals.
Our study found that guanxi connections increase the likelihood that bankers and auditors participate in the same IPO deals.
In 2004, China started to require IPO firms to hire investment banks as sponsors to assist with their IPO applications. We found that guanxi connections increase the likelihood that bankers and auditors participate in the same IPO deals. Such engagement can undermine IPO-audit quality and the interest of IPO investors. Nevertheless, guanxi ties work in the favour of auditors. Our study shows that through their social ties with bankers, auditors can command higher fee premiums and may later land more IPO-audit businesses from connected investment banks.

The Impact on Audit and Bad News Dissemination

The third type of guanxi ties we discuss are those between auditors and audit committees. Auditors play an important role as gatekeepers who ensure the quality of financial reports, which represent a key information source on which many economic decisions are based.

Overall, our studies show that the negative implications of guanxi between auditors and executives or audit committee members outweigh their benefits. Specifically, auditors' social ties with the client management or audit committee significantly reduce the likelihood that the auditors issue modified audit opinions (MAOs), a practice that implies an auditor is able to discover and report accounting irregularities. Even if connected auditors do issue MAOs, the modifications tend to be less severe.

Fourth, we look at how guanxi ties between financial analysts and firm management affect the acquisition and dissemination of bad news surrounding problematic firms. Sell-side financial analysts play a crucial role in discovering and disseminating bad news about firms, not least because managers have a proclivity to keep unfavourable news about their firms under wraps. We found that analysts with social ties to firm management have earlier access to bad news than unconnected analysts. After acquiring the negative information, connected analysts tend to share it with their clients privately while remaining silent in public.

While connected analysts play an important role in enhancing transparency and monitoring management, if they convey negative information privately, it may undermine investor confidence and hinder market growth.

Drawbacks Often Outweigh Benefits

For centuries, guanxi has been a building block of the Chinese business world. Guanxi ties do have the advantage of facilitating information sharing, but their costs to the market often exceed their benefits. Our findings have practical implications for various sides of the financial market, including investors, regulators, audit firms and audit committees.

Investors investing in IPO stocks should be wary of poor audit quality stemming from banker-auditor social ties. When formulating policies that touch on the independence of audit committees and outside auditors, it would be sensible for regulators to consider the role informal personal ties play. Given that investors do discount the earnings audited by engagement auditors who have guanxi connections with corporate executives or audit committee members, mandatory disclosure of such affiliation would be helpful.

Likewise, public accounting firms eager to improve their performance should take into account the guanxi factor when allocating scarce quality control resources and assigning individuals to audit engagements. Industry practitioners who want to strengthen corporate governance should also be aware of the impact of guanxi on external auditing when developing firm-level governance structures.

Learn more: https://cbk.bschool.cuhk.edu.hk/research-whitepapers/where-guanxi-matters-the-modern-chinese-financial-sector/

Hashtag: #CUHKBusinessSchool

The issuer is solely responsible for the content of this announcement.

News from Asia

Highbrow Unveils Its New Beauty Salon at The Adelphi

SINGAPORE - Media OutReach Newswire - 27 June 2025 - HighBrow, one of Singapore’s most trusted names in brow, lash, and nail care, is thrilled to announce the launch of its new beauty salon at The...

Cyberport 5 as Hong Kong's New I&T Landmark

Driving Emerging Strategic Industries Development Heralding a New Chapter in Integration of I&T and the Community HONG KONG SAR - Media OutReach Newswire - 27 June 2025 - The Cyberport ...

VinFast signs dealer financing cooperation agreement with BCA

JAKARTA, INDONESIA - Media OutReach Newswire - 27 June 2025 - VinFast has officially entered into a pivotal financial partnership with PT Bank Central Asia Tbk. (BCA), one of Indonesia's leading p...

Food Expo PRO and Hong Kong International Tea Fair Return in August with New Coffee Zone and Expanded Halal Sector

HONG KONG SAR - Media OutReach Newswire - 27 June 2025 - Organised by the Hong Kong Trade Development Council (HKTDC), the Food Expo PRO and Hong Kong International Tea Fair will be staged concurr...

Food Expo PRO and Hong Kong International Tea Fair: One-Stop F&B Platform Returns in August

Spotlighting Food Science & Tech HONG KONG SAR - Media OutReach Newswire - 27 June 2025 - Organised by the Hong Kong Trade Development Council (HKTDC), the Food Expo PRO and Hong Kong Internat...

The best CFD broker 2025': Octa receives yet another award

KUALA LUMPUR, MALAYSIA - Media OutReach Newswire - 27 June 2025 - Octa, a globally regulated and trusted broker since 2011, was recently named 'The best CFD broker 2025' by the AllForexRating.com...

DHL Express completes the modernization of its Air Hong Kong-operated fleet to boost Asia Pacific network capacity and fuel efficiency

14 A330 freighters in total have been added to the regional network, retiring the previous A300-600F fleet This is part of DHL Express's ongoing investment to enhance its network ...

Rethinking Obesity: Novo Nordisk’s Latest Initiative Urges Singaporeans to Treat, Not Blame

“Beyond the Scale” focuses on obesity as a chronic disease — urging empathy, early intervention, and evidence-based care. SINGAPORE - Media OutReach Newswire - 27 June 2025 - Imagine a chronic dis...

Trend Micro to Deliver AI Factory with Dell and NVIDIA for Secure Infrastructure at Scale

Platforms to accelerate secure AI adoption for modern IT environments HONG KONG SAR - Media OutReach Newswire - 27 June 2025 - Trend Micro Incorporated (TYO: 4704; TSE: 4704), a global cybersecur...

HKICPA renews its Mutual Recognition Agreement with ACCA

HONG KONG SAR - Media OutReach Newswire - 27 June 2025 - The Hong Kong Institute of Certified Public Accountants (HKICPA) is delighted to announce its renewal of Mutual Recognition Agreement (MRA)...

Demand for Home Batteries surges as Federal Rebate Kicks In

A leading provider of energy solutions VoltX Energy has seen a 400% increase in demand for home batteries in the past three weeks as people put d...

Why Sport Remains the Safest Bet in an Uncertain World

When Rome was in crisis, its leaders did not retreat to the Senate. They went to the circus. To the chariot races. To the gladiators. Sport was no...

THE FINE LINE WITHIN HILARIOUS SIGNAGE DESIGN FAILS

It seems like design failures still occur in today’s modern branding era, despite rigorous rounds of approvals behind the scenes. One signage show...

Deputy Announces Exclusive Global Partnership with Predelo to Bring AI to Shift-Based Businesses

Deputy, the global people platform for shift-based businesses, has announced an exclusive partnership with Predelo, an AI Decision Agent-as-a-Serv...

Leftover Budget? The Last-Minute EOFY Tip to Drive Business Success in FY25/26

The countdown is on. With just days left until EOFY, now’s the time to make your remaining 2024–2025 budget work harder and smarter. After workin...

pay.com.au appoints new CEO and Managing Director

The former COO will lead the company’s next growth phase, with ex-CEO Edward Alder transitioning into the role of Managing Director AUSTRALIA, 25...

Sell by LayBy