China's stock market: a marriage of capitalism and socialism.

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China's stock market: a marriage of capitalism and socialism.

The rise of China's stock market during the 1990s was nothing short of breathtaking. For more than 30 years after 1949, China was a centrally planned economy in which virtually all enterprises were state owned or collectively owned. Investments were centrally planned and funded by government fiscal grants as well as by loans from the state-owned monobank system as dictated by the government's central credit plan.

In the late 1980s, as part of enterprise reforms that took place during China's gradual transition to a market economy, local governments in China started experimenting with selling shares of collectively owned enterprises directly to domestic individuals in order to raise equity capital. Curbed trading of enterprise shares soon began and was quickly followed by over-the-counter (OTC) trading in more organized but still informal exchanges. In 1991, two stock exchanges, one created by the Shanghai municipal government and the other by the Shenzhen municipal government, were launched, with the central government's formal approval. Between 1992 and 2003, the market raised a total of 796.79 billion yuan of equity capital. At the end of 2003, China's stock market had 1,287 listed enterprises and more than 70 million investor accounts (CSRC 2004).

Table 1 summarizes the growth of the Chinese stock market since its inception. The market experienced tremendous growth with total (negotiable) market capitalization increasing from 353.1 (86.16) billion yuan at the end of 1993 to 4,245.77 (1,317.85) billion yuan at the end of 2003. (1) Along with the growth in market capitalization, the market also enjoyed a high level of liquidity, with trading volume increasing from 68.13 billion yuan in 1992 to 6,082.67 billion yuan in 2000. The two exchanges now boast a modem infrastructure with a computerized automated trading system, a high-speed nationwide satellite communications system backed by digital data networks, a paperless depository, and an efficient clearing and settlement system. (2) In about a decade, China built a respectable stock market from scratch.

Stock market development in China took off in the early 1990s, roughly at the same time as it did in other transitional economies (Pistor, Raiser, and Gelfer 2000). But China's stock market is performing better than the markets of most other transitional economies, when comparisons are made using standard measures of stock market performance, including the number of listed firms, market capitalization, liquidity, and fundraising capacity (Pistor and Xu 2005: 191). (3) By the end of 2000, while many stock markets in transitional economies were plagued by low market capitalization and low liquidity, China's total stock market capitalization had swelled to more than US$507 billion. That made China's stock market capitalization the second largest in Asia, after Japan's.

China's stock market had three unique features that made its rapid development unique and interesting. First, the government used it largely as a fundraising vehicle for funding state-owned enterprises (SOEs). (4) As a result, most listed enterprises were state controlled, with only one-third of the enterprises' equity capital sold to private shareholders during initial public offerings (IPOs). The other two-thirds of the equity capital raised was held either by state asset management agencies or by SOEs themselves. In an effort to prevent the loss of state control over listed enterprises, the government forbade trading of state-owned shares on China's two exchanges, and the shares could be transferred only after approval from state asset management authorities had been obtained, which made these shares effectively nontradable. The transfer of state-owned shares to private shareholders was rare in the 1990s. At the end of the 1990s, more than 90 percent of the enterprises listed on China's two stock exchanges remained state controlled, with state-owned entities as their controlling shareholders. The rapidity of the development of China's stock market seems to suggest that a s...

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