CIAO DATE: 11/03

The Politics of China's Shareholding System

Introduction

The Chinese stock market is a relatively new phenomenon. The Shanghai Stock Exchange officially opened for business in December 1990, and the Shenzhen Stock Exchange officially began trading in February 1991. Chinese stock market institutions are not simply copies of the Western capitalist model, but are fundamentally shaped by the political economy of reform-era China.

To understand the specific reform policies enacted and the pattern of implementation, one must examine both political and economic factors. Given a certain economic goal (e.g., increasing efficiency in the state sector), there are a variety of policies that could achieve it. Political interests have a strong influence on which of the many potential reform policies is actually chosen. Political interests also strongly influence how these reform policies actually work once they are implemented.

This paper examines the politics of the shareholding system in order to illuminate why the system took the form that it did. In particular, it is impossible to understand the development of China’s stock market without recognizing the close connection between the stock market and state-owned enterprise (SOE) reform. China’s stock market institutions were designed to channel funds to SOEs while also promoting market-based reforms in these enterprises. Although market forces might be beneficial in promoting reform, the Chinese leaders did not intend an uncontrolled expansion of market power. Instead, China’s top Party-State leaders attempted to create stock market institutions that would allow the state to maintain control over listed companies, and over "the market" as a whole. Due in large part to the fact that the resulting institutions greatly limited the power of nonstate shareholders, the actual outcome of implementing shareholding in Chinese SOEs exhibits significant departures from the official account of the characteristics of a "modern enterprise."

The first section of the paper analyzes the political benefits and risks of corporatizing SOEs, primarily from the central government’s perspective. The second section analyzes how political concerns are illustrated in policies toward the stock market. The third section introduces the regional pattern of implementation.

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