Equity Politics and Market Institutions: The Development of Stock Market Policy and Regulation in China, 1984-2003

Abstract

Creating effective market institutions is essential if China's economic transition is to be successful over the long-term. This paper explains and evaluates the institutional development of China's two stock exchanges during 1984-2003, focusing particularly on their governance structures. Local leaders established the exchanges under their own control in late 1990 and used them to maximise local investment and fiscal revenues. Deficient regulation and regular crisis resulted. The China Securities Regulatory Commission (CSRC), the national-level regulator established in late 1992, was unable to effectively exercise control on behalf of the central government over the exchanges during 1990-97. In 1997, radical institutional change occurred, resulting in the empowerment of the CSRC and its effective take-over of the exchanges. Given its new powers, the CSRC has been able to reduce market instability and orient development towards the central government leadership's priorities. The paper argues that the central leadership can, ultimately, manage China's financial sector development through the re-organisation of sector-specific institutions. These include re-organising the appointment system, centralising key powers, reducing budgetary incentives for intervention by local leaders, creating oversight and reporting mechanisms, strengthening Party structures, and clarifying responsibilities within the central government, all things which impacted on stock market development.

Keywords: China, stock market, stock exchange, Shanghai, Shenzhen, CSRC, equity