China's Commitment Problem and the Limits of Financial Market Development

46 Pages Posted: 18 Feb 2021 Last revised: 1 Aug 2022

See all articles by Yongning Deng

Yongning Deng

The University of Hong Kong - Faculty of Business and Economics

Andrew Sinclair

California Institute of Technology

Date Written: August 1, 2022

Abstract

The Chinese government has the power to arbitrarily reform financial markets. This creates a commitment problem whereby good reforms do not have strong long-term protections and can be arbitrarily reversed. Using the Chinese initial public offering (IPO) market, we demonstrate that the inability to protect good reforms incurs large costs that outweigh the perceived benefits. The re-introduction of price controls in the IPO market in 2014 has led to lower price efficiency, a wealth transfer of over RMB 1.3 trillion (USD 203 billion), and capital misallocation.

Keywords: Credible Commitment, China, Financial Development, IPO Market, Underpricing

JEL Classification: G12, G28, G38, O16, P21

Suggested Citation

Deng, Yongning and Sinclair, Andrew, China's Commitment Problem and the Limits of Financial Market Development (August 1, 2022). Available at SSRN: https://ssrn.com/abstract=3779031 or http://dx.doi.org/10.2139/ssrn.3779031

Yongning Deng

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Andrew Sinclair (Contact Author)

California Institute of Technology ( email )

United States

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