Market Solutions to the Information Challenge of China's Legal System: Overseas Listings of State-Owned Enterprises

Abstract

China could not have achieved its economic growth in a legal developmental vacuum. But its evolving legal system is facing unprecedented challenges brought about by vast social changes and the country's increasingly deep integration with the rest of the world. One such challenge is the sudden availability and increases in quantity of new information that actors in the legal system must deal with. This paper will explain how the judiciary, legislature and regulatory apparatuses are affected by this problem, and illustrate the ways in which China has developed unique market solutions to the informational challenges faced by its legal system. Using the example of initial public offerings of equity securities by China's state owned enterprises in Hong Kong and subsequent offerings of securities by these companies in mainland China, this paper will examine the details of one such market solution. It will show that rather than using conventional methods of management training for legal professionals and officials, China has chosen a purely market-oriented transfer of human capital from entities in matured capital markets to those shaping and operating in China's legal system. On both sides of the transfer, each entity, including the market regulator, is driven by fierce market competition. This process has secured more efficient, more effective and longer-lasting transfers of necessary human capital, greater compliance, a race to the top in corporate governance and improvements in regulatory performance. Indeed, improvements in all of these areas have become essential to the survival of both regulator and the regulated. By examining this process, this paper hopes to shed new light on the interactions between economic growth and legal development in China and other developing countries generally in the era of globalization.