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The design and development of a financial system with Chinese characteristics have been dominated by the government since the 1980s. The creation of the stock market is only one stage in that process. Three major features of such government domination are emphasized in this chapter.
First, we will review the difficulties raised when trying to fit a stock market into a socialist market economy. We will consider the motivations behind the transformation in the channels of financing of the economy. While the initial move, in the mid-1980s, involved a shift of the financing of state-owned enterprises from government subsidies to bank-intermediated financing, the subsequent move, in the early 1990s, marked a partial shift to direct financing, with the creation of the stock market.
Second, we will present the major stages of development of the stock market, including the crucial step of Chinese-style privatization, involving the privatization of small- and medium-sized SOEs, sometimes with insider privatization, and the listing of large SOEs, leading much later to the split-share reform bringing the float closer to capitalization.
Third, the heavy involvement of the government is strongly felt in new market creation, the creation and control of institutional investors and intermediaries, as well as the design and monitoring of the functioning of the market. External financial liberalization has been only very limited and gradual, relying on tightly controlled idiosyncratic schemes.
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On the background of privatization in socialist countries, see Roland ( 2000).
A review of the content and implications of this policy is carried out by Hsieh and Song ( 2015).
For an assessment of the effects of privatization see Bai et al. ( 2009
Montinola et al. ( 1995), as the whole literature on that subject in China, use the term decentralization, but they actually mean deconcentration, which refers to the dispersion of control within one single hierarchical organization, and not to the transfer of control from one organization to another. Indeed in China, the local leaders are not chosen at the local level but appointed by the higher level of jurisdiction.
Among the few empirical works which have taken such social factors into account, Matthews et al. ( 2009) is noteworthy. They document that when allocative inefficiency is viewed as the optimal by-product of an allocation of resource inputs subject to employment constraints Chinese banks are similar to their western peers.
An overview of institutional investors is provided by Sun et al. ( 2015).
Empirical work on the effects on China’s stock market of intra-day price limits and trading halts includes Wan et al. ( 2018) and Xu et al. ( 2014). Chung et al. ( 2013) and Lao et al. ( 2018) provide a microstructure study and measures of liquidity. An early review of market organization is provided by Xu ( 2000).
China’s GEM is examined in detail by Liu and Wang ( 2015).
The venture capital industry started in the 1990s with foreign listed funds (Wang and Li 2015), and rose significantly in the new millennium with both private and government backed initiatives (Zhang and Mayes 2018). Ahlstrom and Bruton ( 2003) and Ahlstrom et al. ( 2007) emphasize that both the challenges encountered by venture capitalists and the nature of the investment framework employed in China differ markedly from those of the west.
The development and problems of China’s stock index futures are surveyed by Zhou ( 2015).
The corporate bond market consists of the following types of instruments: Corporate bonds, typically those of SOEs, issued on the interbank bond market (21% of the market); Commercial papers (17%) and medium-term notes (29%) issued by domestic companies and regulated by the National Association of Financial Market Institutional Investors (NAFMII); and Corporate bonds (18%) issued by a whole range of private sector issuers and listed on either the SSE or SZSE, regulated by the CSRC. Issuance standards vary widely among different types of bonds. Corporate bond issuance process is still based on a quota, which is prone to great administrative influence.
Price convergence should be helped by the Connect program but is weakened by a strong regulatory regime and large demand shocks (Hegde and Peng 2017). The price gaps of cross-listed stocks still persist after the Connect but are increasing at a slower speed. Similar patterns are found in the turnover, volatility, and liquidity gaps of the two markets. See also Kashyap ( 2016).
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- A Government-Dominated Financial System
- Chapter 3
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