Abstract
Throughout the 1990s, China's stock market was developed as a tool of industrial policy. It was used to supply capital to state-owned enterprises that remained controlled by the state and whose performance usually declined after listing. Secondary market trading was poorly regulated, again partly for political reasons. As a result, the market has become infamous for extreme volatility, price manipulation and grossly unreliable accounting. This is a problem for the government since, with the withering of the SOE sector, the stock market is ill-equipped to support other important economic policies. The government now needs to improve the efficiency of industry, to raise capital to finance its own liabilities and to put into place a modern pensions system. As a result, the stock market is being quietly but radically reformed. Listed companies are quietly being allowed to privatise. The national regulatory framework has been rationalised and shareholders have been allowed to pursue civil compensation claims against firms in the courts. Financial intermediaries are being privatised and the fund sector is being rapidly expanded. These changes will have an important effect over the next decade, though their immediate impact is negative.
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