Joe H. Zhang and Joan X. Zheng
China’s economic liberalisation has broadened the avenues of finance for its business sector. Apart from traditional bank borrowing (indirect finance), companies can also raise funds by issuing shares and bonds to the public (direct finance) under certain conditions. With China’s capital market gaining sophistication, prudential supervision has become a prominent issue. Further development of the capital market will depend critically on the setting and, more importantly, the enforcement of proper prudential standards.
The term ‘capital market’ is normally used to refer to the equity market and the market for securities at the longer end of the maturity spectrum. However, this chapter has to use the term in a broader sense to cover the whole financial market only excluding the inter-bank market. This definition is adopted because most of China’s equity investments are not through the securities market. The distinction between capital markets and short-term money markets is extremely blurred in China due to the legacy of old centralised credit allocation.
The capital market in China has experienced a transition in the past ten years; and the transition is still under way. The austerity programme launched in June 1993 should be seen as a milestone in the history of China’s capital market development and a starting point for a new phase. The Chinese government aimed to consolidate the achievements of the past ten years in capital market liberalisation through cleaning up the market environment, including its legal framework, and alleviating the economic and social side-effects of liberalisation. The success of the austerity programme eventually hinged on the healthy growth of the capital market.
This chapter aims to examine the evolution of the Chinese government’s regulation of various segments of the capital market, the realities of the business sector and the macroeconomic policy implications of the current regulatory framework. Some of the questions that will be addressed include: why does the Chinese government encourage direct finance? What is the rationale of the policy? And why does the government try so hard to control it at the same time?