China’s Capital Market

Throughout the 1990s, China’s stock market was developed as a tool of industrial policy. It was used to supply capital to state-owned enterprises (SOEs) that remained controlled by the state and whose performance usually declined after listing. Secondary market trading was poorly regulated, again partly for political reasons. As a result, the market has become infamous for extreme volatility, price manipulation and grossly unreliable accounting. This is a problem for the government since the stock market is ill-equipped to support the government’s other increasingly important economic priorities. The government now needs to improve the efficiency of industry in order to sustain employment creation, to raise capital to finance its own liabilities and to put into place a modern pension system. As a result, China’s stock market is being slowly reformed. Listed companies are quietly being allowed to privatise. The regulatory framework has been rationalised. The empowered China Securities Regulatory Commission is pushing forward with a range of policies aimed at improving corporate governance. Shareholders have been allowed to pursue civil compensation claims against firms in the courts. Financial intermediaries are being privatised, the fund sector is being rapidly expanded and foreign investors are gradually being allowed in. These changes, although deeply unpopular among some important groups, will mature the market over the next decade.