Financial Reform and Economic Development in China

Financial Reform and Economic Development in China

Advances in Chinese Economic Studies series

James Laurenceson and Joseph C.H. Chai

This book is a comprehensive, balanced and realistic assessment of China’s financial reform program and future direction. Covering not only the banking sector but also non-bank financial institutions, stock market development and external financial liberalization, the authors examine the impact of financial reform on economic development in China during the reform period. This volume will facilitate a more accurate assessment of the Chinese approach to financial reform, and will therefore, allow more informed future policy choices for both China and other developing and transitional countries.

Chapter 6: Stock Markets and Economic Development in China

James Laurenceson and Joseph C.H. Chai

Subjects: asian studies, asian development, asian economics, development studies, asian development, economics and finance, asian economics, economic psychology

Extract

INTRODUCTION The focus of the preceding discussion has been on issues with respect to credit markets. However, an analysis of financial reform and economic development in China would be incomplete without devoting specific attention to China’s stock markets. The promotion of stock markets in China has received considerable support from many economists for two key reasons. First, stock markets are seen by some as a means of overcoming the negative effects of financial repression in China’s credit markets (Li, 1994, p. 3). For example, if a privately owned firm could not gain access to credit from the state banking system, then an equity issue could represent a viable alterative investment funding source. Cho (1986) takes this argument one step further by contending that even with fully liberalized credit markets, equity markets are an essential component to an efficient financial system due to their ability to alleviate the intrinsic market failures suffered by credit markets. Second, others see stock markets as an ‘indispensible’ means of reforming China’s large SOEs (Xiang, 1998). According to this view, transforming SOEs into shareholding companies can provide them with the necessary funds to modernize, reduce their dependence upon debt finance and improve corporate governance. However, other economists have criticized the view that China should promote the stock market (Singh, 1990; He, 1994). Such writers often point to the successful bank-based development experiences of countries such as Germany and Japan, and on this basis argue that stock markets are not necessary institutions for achieving high...

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