|
|
|
|
Creating Real Capital Markets in China
By James A. Dorn
Introduction
Since 1978, China has embarked on a dramatic reform effort to create a modern economy and to increase the standard of living for the Chinese people. Much progress has been made by liberalizing trade and opening to the outside world. The market has largely replaced "the plan" as the mechanism for coordinating economic activity. Yet the state continues to play a major role in the ownership and allocation of capital. Communist Party leaders wish to "revitalize" state-owned enterprises (SOEs) and "recapitalize" state-owned banks without privatization, in order to maintain their monopoly on power.
The goal of creating viable socialist capital markets is an illusion. The reality is that modern global capital markets require a transparent legal framework that protects private property rights and allows the free flow of information. Asset prices will then reflect the capitalized value of future profits. Without the right to freely buy and sell shares of stock in organized markets, and without freely determined interest rates, there can be no real capital markets and no way to determine true asset values.
Denying Chinese entrepreneurs the freedom to specialize in ownership and risk taking will place them at a huge disadvantage in creating a financial architecture that can rival that of the West. As long as the state has a majority stake in enterprise ownership, investment decisions and managerial appointments will be politicized.
China's accession to the World Trade Organization (WTO) will begin a process of opening China's pseudo capital markets to foreign competition and expertise. Foreign banks are expected to have full access to the local currency market within five years of China's accession to the WTO. Most restrictions on foreign equity holding will be relaxed and Western legal and accounting firms will have greater market access. Geographical limits on foreign insurance firms will be eliminated and those firms will be allowed to offer a wider range of services including pension annuities. Other liberalization measures, especially allowing foreign firms direct trading and distribution rights within China, will spur competition and create an ever larger nonstate sector (Groombridge 2000: 6-7).
Full Text (PDF, 11 pages, 51 KB)