Academic journal article Asia Pacific Law Review

Capitalism with Chinese Characteristics? - the Case of the Developing Securities Law in China

Academic journal article Asia Pacific Law Review

Capitalism with Chinese Characteristics? - the Case of the Developing Securities Law in China

Article excerpt

I. Introduction

Anyone who visited China in 2006-2007 could not help but have the impression that urban Chinese people belonged to two camps - those who were in, and those who were not but wanted to be in, the securities market. In any case, both groups were talking about the market. And you would be in if you were in China then: the Shanghai Composite Index increased by 130.43 percent and 96.66 percent in 2006 and 2007 respectively, reaching its historical high at 6124.04 in 2007.1 However, these days it is said that it would be insulting to ask someone whether he/she holds any shares. Indeed, anyone who invested in the Chinese stock market in 2007 and is still holding the shares in 2014, would have lost two thirds of their fortune - the Shanghai Composite Index has never recovered from its losses in 2008 and has, in the last two years or so, been struggling to hold to a mere one third of its 2007 peak value.

The securities market in China, it seems, is exactly like that in any capitalist country, where the lucky ones make quick money, but overall the 'haves' get even more if they know when to enter and when to exit. In other words, a securities market is the same everywhere and fulfils the same economic and financial functions in society. However, these are not the initial principal reasons that securities markets emerged in socialist China during the post-Mao reform era. In fact, the government sanctioned securities (and slightly later, the futures) market initially emerged in post-Mao China not as a capitalist vehicle for investment and not even principally for the purpose of fund-raising.2 It was proposed as a capitalist means for a socialist solution to tackling a fundamental dilemma in urban economic reform - to maintain socialism while invigorating the highly unproductive and unprofitable state-owned enterprises, or more precisely, to allow capitalist practices in a socialist politico-economic context.3

This article first examines the reasons behind the initial emergence of the securities market in post-Mao China. It then provides a narrative of the rapid development of the market. This is followed by an examination of the features of Chinese securities and futures regulation.

While the analysis here provides a context that explains why China opened its capital market to the outside world only recently, and allows us to understand why shares are still divided into the messy classification of A-Shares, B-Shares, H-Shares etc., the aim is to highlight some specific features of the Chinese securities market and its regulation and thus, to shed light on the potential for corruption in the present system as a result of the dual-system scheme - capitalist practice within a socialist setting without an effective regulatory framework.

II. Early Experiments and Their Politico-Economic Functions

It is well-known that economic reform in post-Mao China started with a rather successful reform in the countryside by adopting the family contracting system. With rapid economic development and growth in the last three decades, many have however forgotten the tremendous difficulties and major controversies in the early 1980s when urban industrial reform started. Looking at the hugely diversified ownership system in the present Chinese economic system and the increasing share of the private sector in the economy, one also easily forgets the overwhelming domination of the state-owned enterprises ('SOEs', then still called state-run enterprises) in the industrial sector in the 1980s. In fact the whole politico-economic reform in post-Mao China has been centred on the reform of the SOEs, and the most innovative politico-economic theories were largely about approaches to SOE reform.

The reality was that China rejected the idea of large scale privatisation and the 'Big Bang' approach adopted in the former East European countries, fearing social unrest and instability in a large yet still poor country. …

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