The Chinese Experience
Chapter 2: Historical background and characteristics of the Chinese stock market
The Chinese Experience
This chapter provides some historical background on China’s stock market and introduces its characteristics. It contains three sections. Section 1 starts with a brief discussion of the general weakness associated with state-owned enterprises (SOEs); it then reviews the process of China’s SOEs reform. Section 2 contains a review of the short history of the Chinese capital market and shows the entangled link between the capital market and SOE reform. It also gives a succinct description of the four characteristics of the Chinese stock market. Section 3 introduces the ownership structure of listed companies and further examines the issue of concentration ownership. To understand the Chinese capital market, one must first understand its SOE reform, as they are two sides of the same coin. Just like many other former socialist countries, before the state economic reform in 1978, SOEs dominated China’s economy, particularly its industrial sector. Also like its socialist counterparts, at the beginning of the economic reform, numerous SOEs were plagued by sloth, inefficiency and waste. The inefficiency of SOEs has been repeatedly illustrated by decades of practice, both in socialist countries and capitalist countries. Then what is the root cause of SOEs’ inefficiency? The answer lies in the state ownership per se. State ownership resulting in costly agency problems and the soft budget constraints problem – both are responsible for the inefficiency of SOEs. Looked at from an agency perspective, SOEs can be described as an example of ‘concentrated control with no cash flow rights and socially harmful objectives’ (Shleifer and Vishny, 1997, p. 768).
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