Challenges from WTO Membership
Advances in Chinese Economic Studies series
Edited by Kam C. Chan, Hung-Gay Fung and Qingfeng ‘Wilson’ Liu
Chapter 12: Privatization, Corporate Structure, Market Transparency and Capital Markets
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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