The Development of the Chinese Stock Market and Critical Issues for Future Development

The Development of the Chinese Stock Market and Critical Issues for Future Development


The adoption of the conventionally popular stock corporation system began over the past 20 years in China, and has hitherto been graded as one of the most prolific stock markets in the world. After several experimentations, the Shanghai Stock Exchange was inaugurated in the year 1990, followed by Shenzhen Stock Exchange in 1991 (Gaur, Malhotra & Zhu, 2013). The Chinese stock market is regarded as one of the most rapidly growing, since by the year 2005, over 1300 companies had listed in the market, in the category of Type A shares alone – which are for domestic investors. The market value was rating at over 3,243 billion Chinese Yuan, and over 73 million investors became shareholders in the listed companies, which generated over 1 trillion Yuan in funds. More surprisingly, there are over 120 security companies, and over 500 billion Yuan capitalization of institutionalized investors (Li, 2012).

On the other hand, participation of foreign capital in the Chinese stock market has also gotten a window, thereby allowing over 100 companies to enlist in the Shanghai and Shenzhen Stock Exchanges in the category of Type B shares. The capitalization of this category of shares is estimated to be over $30 billion (Li, 2012). Other Chinese companies, totaling to a 100 in number, have also been enlisted in foreign stock markets, like the New York Stock Exchange, and the Hong Kong Stock Exchange. In the current Chinese economy, the stock exchange plays a key role in raising funds to finance equity offerings. Since the adoption of the stock market trend, China has experienced tremendous changes and benefits in its business sphere, as has been discussed above. Reform policies adopted by the policy makers have been crucial in enhancing this transformation, where the economy changed from a centrally planned economic system, to a market economic system, which is based on competition principles and efficiency, as opposed to the former socialistic principles and ideas. This paper proceeds to discuss the historical development of the Chinese stock market, presents a chronological account of the forces behind this development, and analyses some critical issues for future development.

History of Chinese Stock Market Development

In the early 1980s, some Chinese economists raised the possibility of employing a shareholding system as a method of improving governance structure and corporate ownership. At this same time when this idea was being conceived, some companies had started issuing equity shares to the public, in the form of Initial Public Offers, in order to widen their capital bases. For instance, the Shenzhen Joint Investment Company was the first enterprise to initiate an Initial Public Offering in 1983. Later, Shanghai Feiyue Yinxiang and Beijing Tianqiao Baihuo Companies followed suite in 1984 (Zhang & Ma, 2012). These companies registered huge success, and many other companies adopted this move, thus making shareholding a generally accepted practice by the government. As a result, the number of shareholding companies and equity shares increased several folds, and a demand for a more organized and formal structure of exchange of these shares heightened. By the end of 1980s, a phenomenon of over-the-counter trading of shares was common in several Chinese cities, including Shenzhen and Shanghai, where most of the equity shares and shareholding companies were concentrated (Zhang & Ma, 2012). This trend brought enormous drawbacks, including a proliferation of black market deals, and gave both to a completely unregulated and unorganized market structure. The government thus decided to set in in order to curb such unorthodox developments, and later established the Shanghai Stock Exchange in 1991.

These two establishments had gone a long way in centralizing the trading of shares, and other advanced trading mechanisms like paperless trading and computerized matching of orders have been developed. In the early 1990s, the two exchange markets also launched Type B shares, which were largely dominated by Hong Kong and US dollars. This type of shares, as opposed to type-A shares, was largely available to those investors from outside mainland China. They were aimed at attracting foreign currency and investment to the local Chinese economy. The stock market in China further improved, since the government, in 1993, stipulated that the system of shareholding and stock exchange are important components of the socialist market system. The policy makers realized that shareholding, as applied in modern structures of corporations, has several advantages including transparency of property ownership and accountability in accumulation of public capital. Further, it was realized that the stock market is important in the Chinese economy, as it helps in efficient and equitable allocation of resources in the society.

Due to the heightened concern and interest in the stock market, the Chinese government had a direct impetus in the development of the market. It therefore underwent accelerated growth between the years 1992 and 1993. Apart from the alarming number of listed companies, the infrastructural component of the market also greatly improved. Both exchange markets made admirable steps in their trading patterns, and the national capital invested in these markets skyrocketed. At the same time, due to the growing number of listed companies, security firms to serve the population also increased in number. The government, through its policy-making framework, enacted several important regulations which were geared towards ensuring smooth mode of operation s in the stock markets.

The stock market of China also developed under a regime of repressed finance. Financial repression in China was created through an agglomeration of several capital controls which were imposed in the international market, as well as administrative measures that were put in place by the central government to discourage development of potential competition resulting from various financial assets, such as enterprise stocks, bank deposits, enterprise bonds, and other types of government bonds (Chu-Chia, Chung-Rou & Hui-Pei, 2011). These capital controls helped prevent capital outflows from the Chinese economy to other foreign economies through direct investments, offering of long-term loans; while the administrative controls which were meant to mitigate domestic competition sought to avoid sourcing of returns from various financial assets, and instead center on a cheap and secure alternative like stock market. During the initial stages of introduction of the stock market, there existed a very weak legal framework that gave little protection to both investors and listed companies. One of the most widely used indicators for shareholders’ rights protection – developed by Porta et al. (1998), revealed that China only scored 3, in contrast to the average score of 3.61 common with all transitional economies.

The State of Chinese Stock Market Today

The Chinese stock market is a sizeable scale today, with over 1377 listed companies, and a market capitalization of well over 3.5 trillion, and a monthly volume of trade of over 364 billion. Due to this high number of listed companies, security forms have also increased in number to over 300, which are licensed to provide brokerage services, operating in over 2500 branches countrywide. This wide base of stock brokers has given rise to over 73 million stock trading accounts, adding to the extensive hive of the stock market (Vakhrushin, 2011). In addition, fund management companies, which have reached 53 in number, offer numerous mutual funds, which are distributed evenly throughout the massive network of commercial bank offices. The management and flow of operations at both Shanghai and Shenzhen stock exchanges have been largely optimized by the introduction of electronic trading, placing China ahead of all economies, with the most robust market infrastructures, securities, and commercial banks in the world.

After China entered the World Trade Organization in 2001, its market became more liberal and globalized. The government even decided to liberate several weak parts of the economy to foreigners, and currently, a myriad of foreign banks and insurance companies are at liberty to conduct businesses in China, though a few limitations on some foreign banks and insurances still exist (Yi, Rong, Zhiyuan & Hasan, 2012). In the market of securities, foreign institutions are allowed to invest in fund management and domestic brokerages, which can jointly underwrite A shares, as opposed to the past when foreign investors were allowed to trade on type-B shares. Moreover, Since the Chinese economy inaugurated the Qualified Foreign Institutional Investors plan, which allows foreign investors to buy Type-A shares, there has been an increase of these foreign companies which are listed in both markets, totaling to over 40 in number.

The opening of the financial market has also contributed to the revitalization of the stock market, to become one of the most active in the world. The market capitalization of the companies listed in the public stock market in 2007 was registered as the second largest in the world, closely coming after that of the United States stock market (Layton, 2008). State-owned enterprises (SOEs), foreign banks, and other financial institutions are being listed one after the other, and the security companies are also rapidly progressing. The stock market in China is now treated jointly with that of Hong Kong Special Administrative Region, since most companies enlist in both markets (Lin, Fang & Cheng, 2010). A majority of the listed companies have their origins in the more robust eastern coast, while the western and central regions share the remaining percentage. The types of shares in these markets have proliferated to include a wide variety of shares. These are: the State-owned shares, which are shares of a state institution obtained in exchange for capital contribution; domestic legal-person shares, which are sponsors’ shares that are held by domestic legal persons; foreign legal-person shares, which are held by foreign legal persons; private placement of legal-person shares, which refer to those shares that are issued by private placement, and subscribed by legal persons instead of sponsors; and staff shares which refer to shares issued by private placement companies, but are not yet listed (Xu, Zeng  & Tam, 2012). Thus, the stock market offers a wide range of varieties of shares, incorporating virtually every level of investor in the Chinese market.

The securities-market laws and regulations in China’s stock market have also gone through a series of transformative steps. The main motive of regulatory reforms is to establish a fair, just and open system that would offer the most conducive and enabling environment for stock exchanges. During the antiquity of China’s stock market, the Shenzhen and Shanghai stock exchanges were primarily governed by Interim Rules on Administration of Issuing and Trading of Shenzhen Stock Exchanges, and Interim Rules on Administration of Shanghai Securities respectively (Wang, Miao & Li, 2013). Later in 1993, the State Council enacted Interim Measures on the Administration of Stock Issuing and Trading, which was considered one of the most important laws in the stock market. In 1999, the Chinese government issued a fully completed and operational Securities Law, which was aimed to protect the interest and security of investors, make the Chinese stock market compatible with globally accepted practice (Zhu & Jiang, 2012).

Some Challenges Facing China’s Stock Markets

The Chinese stock market is faced with several challenges, despite its widely celebrated success. As earlier discussed, the market developed out of a centrally planned economy; therefore, it inherited a share of the formidable weaknesses of the economy.   The government has constantly been intervening in the management of the stock market, rather than offering it autonomy to run its own affairs. The government largely holds the key to the market’s expansion of contraction, and has been more often than not used as a source of finance for State-owned enterprises (Yi, Rong, Zhiyuan & Hasan, 2012). Even today, most of the companies that have enlisted in the stock market are under the control of the state, while a majority of privately-owned companies are denied free access to the market. Furthermore, there is obvious bias with regards to equity shares financing, as the market seems to favor SOEs at the expense of privately-owned businesses (Tianshu, 2011). Economists are left with the puzzle of understanding this anomaly, as current economic trends show that private businesses are the backbone of China’s economy, accounting for over two-thirds of the economies GDP (Zhiyuan, 2008).  Another challenge facing the market is the large proportion of non-publicly-traded shares, where acquisitions and mergers of listed companies are only done without the inclusion of the public, since the management boards of the stock market is largely dominated by state representatives, who make decisions favoring their own state enterprises. In most of these deals conducted in private, many investors and market regulators are often kept in the dark, until the final stages of the transactions are reached (Siwei, 2009). This scenario dictates that the stock market is incapable of performing its basic functions perfectly, including the task of fostering the exchange of shares and property rights, and transparent allocation of resources. These, among other drawbacks, have been constant pains in the success of the economy.

Critical Issues for Future Development

The panned or administrative nature of the Chinese stock market has over the years stifled the market’s innovative prowess, which has left room for rapid institutional development, made possible by the spontaneous growth of overall China’s economy (Huiguan, Shihong & Xiaojing, 2011). While it is widely accepted that access to the limited fund-raising capacity of Chinese domestic stock market has been over the years reserved for state-owned enterprises, there has been increased demand for capital by various private entrepreneurs and companies. Currently, there is a growing trend where most private companies enlist their companies with the Hong Kong Stock Exchange and New York stock exchange instead of Shanghai and Shenzhen markets. Lately, in 2010, it was reported that the funds raised through Hong Kong Stock Exchange alone had surpassed that jointly raised through the two markets in mainland China (Yang, Yang  & Zhou, 2012). This reveals that the overseas stock markets are more crucial for corporate China than domestic mainland markets.

This dominance by Hong Kong Stock Exchange of the corporate market in China is likely to prompt the economy into adopting various political and legal reforms. It is estimated that even if these reforms are initiated right away, it will take some considerable time for the condition to reverse, and bring more vitality to mainland China than the overseas markets. It will also take many years, as the late Qing had stated, for proper acceptable degree of regulatory and judicial reforms and independence to be established (ODY, 2012). Freedom of press is considered a key issue in the development of the stock markets, but this has not been fully institutionalized in the economy. Nonetheless, the dependence of Chinese corporations on overseas markets will present a significantly competitive pressure on the markets in the mainland. Several structural and legal reforms will have to be initiated, so as to increase the robust nature and performance of these markets. Otherwise, most prolific companies will shift to the overseas companies, and in the event, ripping the domestic markets of the power and potential that they would otherwise have greatly enjoyed.

The Chinese government needs to introduce a harmonious society, which will serve to reduce the disparities existing between state-owned enterprises and privately owned enterprises, as well as between the rich and the poor. The socialist ideology is likely to be the next big trend in the stock market, with the economy fostering Deng Xiaoping’s statement of ‘wealth for everyone’ (Cao, 2012). The political system as the well as policy have great influences on the operations of the stock markets, and with the commitment of the government, the nature of these stock markets will be transformed into autonomous institutions, able to make their own independent decisions on expansion, contraction, and enlisting of companies. This way, it is almost sure that the market infrastructure of China will surpass even that of the US market, to become the world leading stock market.


The development of China’s stock market is a phenomenal activity, whose emblem is evident in the current economic status of the national Chinese economy in the global market. it is a wonder how the stock markets proliferated that rapidly in the face of weak legal structures, government bias, and stiff competition. Nonetheless, China’s stock market grew to become one of the largest in the world, with an alarming number of listed companies, and a huge capital base. Over the years as the market expanded, several challenges have surfaced, making the domestic markets lag behind those in overseas, such as Hog Kong and New York. Political interference and weak policies have been largely blamed for this precedence, and future trends may see a complete reformation in the policy structures and legal frameworks, to allow for more market autonomy, and eliminate biases associated with state interference.

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