China's Stock Markets and the World Trade Organization

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I. INTRODUCTION

The People's Republic of China's (PRC or China) bid to join the World Trade Organization (WTO) will fundamentally impact the world economy and will critically affect China's developing stock market. Although much attention has been devoted to the needed strengthening of China's intellectual property rights as a precondition to joining the WTO, the potential changes in China's stock markets have received scant attention. Basic improvements in the efficiency, transparency, and liquidity of China's stock markets will flow from WTO membership.(1) Specifically, changes mandated by the WTO's General Agreement on Trade in Services (GATS)(2) will liberalize competition in China's financial and accounting services markets, increase the number of financial intermediaries, and foster the development of China's stock markets.

This Article analyzes several issues implicated by China's WTO bid. Part II examines the rationale behind China's desire to join the WTO. Part III examines some of the domestic, economic, and political issues implicated by China's WTO bid. Part IV discusses the GATS and its impact on China's financial and accounting services. Part IV also comparatively analyzes how the GATS affects financial markets in Hong Kong, Indonesia, and Malaysia and will try to discern lessons for China from the analysis. Hong Kong is valuable for two reasons: (1) as a member of the WTO recently reunited with the PRC, Hong Kong can provide China with practical knowledge on compliance with WTO standards, and (2) with arguably the most liberal securities markets in the world, Hong Kong should represent a goal for liberalizing Asian economies, including the PRC. Malaysia, along with Indonesia, provides insight into developing Asian securities markets. Because Malaysia has more experience liberalizing its securities markets, it possesses a more developed securities market. Indonesia also provides valuable insight into the most rapidly developing securities market in Asia, along with economic liberalization that is starting to dismantle the somewhat pervasive government involvement in the economy. Indonesia also provides some insight into the recent Asian financial crisis, with potential lessons for China.

II. CHINA'S RATIONALE FOR JOINING THE WORLD TRADE ORGANIZATION

When the People's Republic of China emerged from the political, cultural, and economic chaos of the 1970s, it was confronted with an Asia whose economies were growing at an astonishingly fast rate. In response, since the early 1980s, China has engaged in a series of economic reforms with the goal of development through economic liberalization. China's economic liberalization and reform are fueled, in part, by the profits from China's labor-intensive, export-led growth strategy.(3) Economic liberalization has been somewhat successful. Between 1978 and 1993, China's exports grew by US$82.05 billion while China's GDP, as measured in constant 1987 yuan, grew by US$1.396 trillion.(4) The pressure to continue exporting has continued into the 1990s because by the end of the 1990s, China is expected to become a net importer of food and energy, exhausting export earnings from petroleum exports.(5)

In light of the exhaustion of petroleum export revenues, China must look for new export sectors to provide basic resources for its domestic markets.(6) In order to develop and exploit new export sectors, China must be given access to foreign markets and maintain that access, especially to the U.S. market.(7) Protecting access to open international markets has long been the goal of the WTO. Therefore, "the PRC must ... support the [GATT] to reduce barriers to international trade."(8)

In 1986, the PRC began negotiating to resume its General Agreement on Tariffs and Trade (GATT)(9) membership, which had been withdrawn by Taiwan in 1950. In 1987, a GATT working party was established to consider the PRC's potential status as a GATT contracting party. …