Advances in Chinese Economic Studies series
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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