In 1995, China was ranked by the World Economic Forum's Competitiveness Report for the first time. The report found that China was second in capital formation, behind only the United States, and that China's growth in gross domestic product (both overall and per capita) was highest in the world. Nevertheless, with its large state sector and arcane, protectionist regulatory structures at every level of government, China finished 34th out of 48 ranked nations in overall competitiveness. With respect to its underdeveloped financial markets, the subject of this paper, China ranked 46th out of 48 and last in terms of stock capitalization.(1)
Throughout Asia, the corporate sector relies more heavily on bank finance and on internally generated funds and less on equity than in Western markets. Still, China's inexperience with corporate equity is extreme, and far more than elsewhere the result is that firms are weakened by a dependence upon banks (in this case officially sponsored banks) and fragmented, inefficiently utilized domestic markets for capital. According to a study by the World Bank, in terms of its value in the overall GDP of the national economy, stock market equity is less important in China than in the economies of every other major East Asian emerging market (Hong Kong, Indonesia, Korea, Malaysia, the Philippines, Singapore, Thailand).(2)
As if this were not bad enough, the equity markets that now serve Chinese companies are awash in problems. The Chinese government, in its winding, long march from socialism, began permitting state-owned enterprises to issue stocks in the second half of the 1980s. Yet a decade later, foreign commentators describe the exchanges as plagued by "volatility, scandals, regulatory weaknesses, a limited choice of listed firms and a void of reliable information."(3)
After a brief period of securities experimentation resulting in depressed markets and some justifiably negative press, can the government claim any successes in its new securities markets?
It is true that China's securities markets are nascent, poorly regulated and plagued by irregularities, some of which will be outlined here. However, a close look at the markets suggest the serious attention they are given by China's top leaders, by Chinese managers and by millions of domestic investors.(4)
This article argues that despite significant problems, there is one other group -- beyond the government, the state enterprise managers and the 10 million Chinese investing in the most prominent markets for equities -- that should take a more serious look at China's securities markets: international analysts of China's political economy. If one includes China's securities issued and traded outside of the officially sanctioned exchanges in Shanghai and Shenzhen, the securities markets are large, and their precipitous rate of growth is helping to fuel the Chinese economy. This article argues, moreover, that these markets are a significant force pushing China's integration into the world economy.
Some background information on China's securities reforms is provided below, followed by an outline of the problems that the Chinese government must face in order to enhance the viability of its markets. Next, the article examines, despite the peculiarities of "capitalism with Chinese characteristics," the growing importance of Chinese securities markets. Finally, it focuses on how, as the Chinese government struggle to reform the weaknesses of equities markets, it is being pushed slowly into further economic integration with international capital. The conclusion attempts to assess the consequences of this "peaceful evolution" and the increasing international economic interdependence between China and its trading partners.
Background to the Chinese Securities Markets
China possessed small stock markets for Chinese stocks from 1911 to 1949, but Mao Zedong shut down all of them (outside of Hong Kong) by 1952. …