China’s Capital Markets

China’s Capital Markets

Challenges from WTO Membership

Advances in Chinese Economic Studies series

Edited by Kam C. Chan, Hung-Gay Fung and Qingfeng ‘Wilson’ Liu

China’s economy has been growing rapidly since the late 1970s and is expected to maintain this momentum in the foreseeable future. Coupled with the biggest population in the world, there is tremendous growth potential for China’s capital markets and financial services industry, both vital to the continued development of the economy. The contributors present research on all facets of China’s markets including: stock and bond markets; futures and over-the-counter markets; regulatory issues; and the development and roles of financial institutions such as brokerage firms, banks and insurance companies. Also addressed are the recent performance of equity markets, the emergence of small and medium enterprises, and the state banks’ bids to be listed in overseas stock exchanges. Taken together, the book sheds a welcome light on China’s overall economic growth.

Chapter 12: Privatization, Corporate Structure, Market Transparency and Capital Markets

Kam C. Chan, Hung-gay Fung and Qingfeng 'Wilson' Liu

Subjects: asian studies, asian economics, economics and finance, asian economics, financial economics and regulation


Kam C. Chan, Hung-gay Fung and Qingfeng ‘Wilson’ Liu INTRODUCTION The capital market of a country is important because it facilitates efficient allocation of resources and provides an important mechanism whereby signals reflecting underlying information can be assessed by firms and investors. The competitiveness and efficiency of a financial market can be improved through two sources: a competitive goods market and removing market impediments or barriers of a financial market (Mehta and Fung 2004). A financial market is derived from a goods market. A competitive goods market would make the financial market more efficient and competitive. Thus, improving the working of the goods market will help the financial market. Second, removal of financial market impediments or barriers helps a smooth functioning of a financial market and market participants are able to enter and exit the financial market. Consequently, the efficiency of the financial market improves. This chapter examines how China can improve its goods market. It also discusses various ways to mitigate market impediments in China’s financial market. It focuses our attention on China’s privatization programs that improves efficiency of Chinese firms. Many state-owned firms were inefficient under China’s centrally planned economy before its economic reforms in 1978. The state-owned firms had monopolistic market power and they had no incentive to improve their efficiency. China’s privatization programs implemented in the mid-1980s were an important step in getting rid of inefficient state-owned firms. An important process of the privatization program is through...

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