The Development of China's Stock Market, 1984–2002. By Stephen Green. [London and New York: RoutledgeCurzon, 2004. xv+287 pp. £65.00. ISBN 0-415-32466-1.

Abstract

Does the spectacular development of China's stock market present a theoretical puzzle? On one hand, within a short period of a little more than a decade (1990–2002), the total capitalization of the market grew from a negligible size to a level equivalent to more than 50 per cent of the country's GDP, and even if excluding non-floating shares held by the state and legal persons, the capitalization level was still equivalent to some 16 per cent of GDP. On the other hand, until very recently few of the institutions that underpin successful stock markets elsewhere were present. This seems to be in contradiction to the teaching of neo-institutional economics, which holds that only when the state is credibly committed to clarifying and defending functional institutions will people feel confidence enough to engage in complex transactions like stock trading. Does this imply a paradox? The author argues in this book that it is not so straightforward.The book provides detailed and convincing evidence to show that the impressive growth of China's stock market since 1990 has been to a great extent a result of policy-driven development favoured by a lack of alternative investment opportunities for increasingly wealthy private investors. Chinese companies in general viewed stock listing as a privilege and a fund-raising mechanism. Market participants perceived that the quality of listed companies was generally poor but that investors were protected because of the constant financial and policy supports provided by both local and the central governments. As a consequence, market participants had little incentive to pay much attention to corporate governance and other fundamentals. Would such features lead to a pessimistic scenario, meaning that the development would not be sustainable? Not so simple, the author suggests.