《中国金融市场 Chinese Financial Markets》补充阅读文献：stock market in china's modernization process（chen zhiwu-2006）.pdf

frastructure necessary for financial market development is largely or not functioning in its intended way. As a result, for example, the Chinese stock market from October 2002 to March 2006 went down by 15%(the only down stock market around the globe over this period, as measured in U.S. dollar returns), even though Chinas GDP managed to grow by more than 9% year over year. To highlight the declining investor confidence in China's stock market. note that in 2005 each month brought in fewer than 100,000 new stock accounts, whereas in 2001 the monthly increase in investor accounts was more than 800.000. 3 Further deepening of Chinas stock market requires the development of a more acceptable institutional infrastructure, so that investors can be confident that the separation between ownership and control -- the heart of a public equity market -- will not mean the lack of protection for their hard-earned money. Such an infrastructure contains three key components:(i reliable and independent legal institutions, (ii) an independent regulatory body, and (iii) uninhibited informational institutions. The former two ensure that investors assets will be protected and that their interest will be maximized to the extent possible by management insiders(black 2001 and Coffee 2001). At the center of these two sets of institutions is the rule of law. The last component serves to provide investors with unbiased useful and substantial information so that they can reliably assess the value of each stock as an investment opportunIt As is known in the literature such impersonal external and checked-and-balanced institutions are what China has traditionally lacked and still lacks. In this sense, the search for a deep and liquid stock market is synonymous with Chinas process of modernization. Until the rule of law is a basic characteristic of the Chinese society it is hard to imagine that china will have a well developed stock market. A functioning constitutional system is a pre condition for a prosperous public equity market Over the last 150 years, China has engaged in a long march towards a modern society Scholars and policy makers in China have often identified modernity with the modernization of industry, of agriculture, of national defense, and of science and technology, that is, the so 2 See Norris(2006) SourceTheChineseSecuritiesRegulatoryCommissionwww.csrc.gov.cn

infrastructure necessary for financial market development is largely missing or not functioning in its intended way. As a result, for example, the Chinese stock market from October 2002 to March 2006 went down by 15% (the only down stock market around the globe over this period, as measured in U.S. dollar returns), 2 even though China’s GDP managed to grow by more than 9% year over year. To highlight the declining investor confidence in China’s stock market, note that in 2005 each month brought in fewer than 100,000 new stock accounts, whereas in 2001 the monthly increase in investor accounts was more than 800,000. 3 Further deepening of China’s stock market requires the development of a more acceptable institutional infrastructure, so that investors can be confident that the separation between ownership and control --- the heart of a public equity market --- will not mean the lack of protection for their hard-earned money. Such an infrastructure contains three key components: (i) reliable and independent legal institutions, (ii) an independent regulatory body, and (iii) uninhibited informational institutions. The former two ensure that investors’ assets will be protected and that their interest will be maximized to the extent possible by management insiders (Black 2001 and Coffee 2001). At the center of these two sets of institutions is the rule of law. The last component serves to provide investors with unbiased, useful and substantial information so that they can reliably assess the value of each stock as an investment opportunity. As is known in the literature, such impersonal external and checked-and-balanced institutions are what China has traditionally lacked and still lacks. In this sense, the search for a deep and liquid stock market is synonymous with China’s process of modernization. Until the rule of law is a basic characteristic of the Chinese society, it is hard to imagine that China will have a well developed stock market. A functioning constitutional system is a precondition for a prosperous public equity market. Over the last 150 years, China has engaged in a long march towards a modern society. Scholars and policy makers in China have often identified modernity with the modernization of industry, of agriculture, of national defense, and of science and technology, that is, the so 2 See Norris (2006). 3 Source: The Chinese Securities Regulatory Commission, www.csrc.gov.cn. 2

called"Four Modernizations". These Four modernizations have been a defining theme of social and political movements by generations of Chinese since the 1850s. As such, the development of impersonal legal institutions has often not been thought to be a crucial part of the modernization process. Consequently, not as much efforts have been spent on modernizing Chinas institutional infrastructure In this chapter, our purpose is to review the history of China's stock market development from the 1860s to the present and then make projections on its future path. In the discussions to follow, a central question that we attempt to answer is absent of the necessary impersonal legal and regulatory institutions, what functionally substitutive arrangements did China come up with to induce public investors to join stock trading? That is, what was done to overcome the confidence and trust barriers? How well have such functional substitutes worked in promoting capital market development? What we will see is a constant struggle between the traditional Chinese preferences for informal or relationship-based rules of business transactions and the stock markets dependence on formal structures of contracting and governance. This struggle in the capital market place mirrors closely the struggle by the larger Chinese society with the process of modernization. It has led to frequent disruptions and crashes in stock trading. Chinas stock market history thus reflects its modern social and political history. In the same sense, its future will also mirror the social and political future of China 1. The origin of china's stock market: 1860s to 1911 The word for"securities", ZhengQuan, came into the Chinese language in the 19 century when trading in stocks and bonds was first brought to Shanghai by foreigners in the 1860s. Initially, stocks were issued by foreign registered companies and traded mostly by non-Chinese residents in the treaty ports. Examples include the Shanghai Steam Navigation Company(started in 1862 by russell and Company)and hSBC(1865 by the British). It was in the early 1870s when the first indigenous joint-stock company -- The China merchants Steam Navigation Company(CMC, in short)--- was established and its shares were later traded informally on the Shanghai streets. Other domestic enterprises of the modern

called “Four Modernizations”. These Four Modernizations have been a defining theme of social and political movements by generations of Chinese since the 1850’s. As such, the development of impersonal legal institutions has often not been thought to be a crucial part of the modernization process. Consequently, not as much efforts have been spent on modernizing China’s institutional infrastructure. In this chapter, our purpose is to review the history of China’s stock market development from the 1860’s to the present and then make projections on its future path. In the discussions to follow, a central question that we attempt to answer is: absent of the necessary impersonal legal and regulatory institutions, what functionally substitutive arrangements did China come up with to induce public investors to join stock trading? That is, what was done to overcome the confidence and trust barriers? How well have such functional substitutes worked in promoting capital market development? What we will see is a constant struggle between the traditional Chinese preferences for informal or relationship-based rules of business transactions and the stock market’s dependence on formal structures of contracting and governance. This struggle in the capital market place mirrors closely the struggle by the larger Chinese society with the process of modernization. It has led to frequent disruptions and crashes in stock trading. China’s stock market history thus reflects its modern social and political history. In the same sense, its future will also mirror the social and political future of China. 1. The origin of China’s stock market: 1860’s to 1911 The word for “securities”, ZhengQuan, came into the Chinese language in the 19th century when trading in stocks and bonds was first brought to Shanghai by foreigners in the 1860’s. Initially, stocks were issued by foreign registered companies and traded mostly by non-Chinese residents in the treaty ports. Examples include the Shanghai Steam Navigation Company (started in 1862 by Russell and Company) and HSBC (1865 by the British). It was in the early 1870’s when the first indigenous joint-stock company --- The China Merchants’ Steam Navigation Company (CMC, in short) --- was established and its shares were later traded informally on the Shanghai streets. Other domestic enterprises of the modern 3

corporate form followed suit, including the Jiangnan Arsenal, the Shanghai Cotton and Textile Co., and the Kaiping Coal Mines, ventures that formed the original foundation of China's modern manufacturing and mining industries Stock trading was thus introduced into China around the same time period as stock exchanges were established in many other countries, including Switzerland(1850), Spain (1860), Hungary(1864), Turkey(1866), Australia(1871), Czechoslovakia(1871), Argentina (1872), New Zealand(1872), Canada(1874), Brazil(1877), India(1877), Norway(1881) South Africa (1887), Egypt(1890), Chile (1892), Greece (1892), Mexico (1894), and Singapore(1911). It coincided with the major stock market craze -- the railroad stock bubble ---in the 1860s and 1870s in the U.S. and England. China is known to be the first country that invented paper money dating back to the Song dynasty(960-1279). But, itdid not venture into innovations in securities trading until the late 19 century. still, globally speaking, China was not far behind in adopting this financial technology: tradable ownership shares. The question is then: what led to the adoption of the modern corporate form and its twin - stock trading China? How did this western financial innovation fit in China's political, legal and social traditions? China's venture into the stock market and its associated corporate form was largely consequence of the Self-Strengthening Movement following the defeat in both Opium Wars (1839-42 and 1858-60)to Britain and France(in the second Opium War). The wars taught th Chinese elite a lesson that China was far behind in military technology and that in order to win over the West and regain national pride, China must catch up with western military and industrial technologies. But, adopting such technologies and developing the necessary manufacturing infrastructure required much capital, large sums of capital. Yet, at the time the Qing government was financially constrained. The state would not have the needed resources to take on the projects directly. The financing challenge was therefore daunting Note that after losing the first Opium War in 1842, China signed the historical Nanking Treaty with Britain. As part of the agreement, China agreed to open five port cities See Table I of Goetzmann and Jorion(1999)for a more complete list of stock exchange starting times around the globe See von Glahn(2005)

corporate form followed suit, including the Jiangnan Arsenal, the Shanghai Cotton and Textile Co., and the Kaiping Coal Mines, ventures that formed the original foundation of China’s modern manufacturing and mining industries. Stock trading was thus introduced into China around the same time period as stock exchanges were established in many other countries, including Switzerland (1850), Spain (1860), Hungary (1864), Turkey (1866), Australia (1871), Czechoslovakia (1871), Argentina (1872), New Zealand (1872), Canada (1874), Brazil (1877), India (1877), Norway (1881), South Africa (1887), Egypt (1890), Chile (1892), Greece (1892), Mexico (1894), and Singapore (1911). 4 It coincided with the major stock market craze --- the railroad stock bubble --- in the 1860’s and 1870’s in the U.S. and England. China is known to be the first country that invented paper money dating back to the Song dynasty (960 – 1279).5 But, it did not venture into innovations in securities trading until the late 19th century. Still, globally speaking, China was not far behind in adopting this financial technology: tradable ownership shares. The question is then: what led to the adoption of the modern corporate form and its twin --- stock trading --- in China? How did this western financial innovation fit in China’s political, legal and social traditions? China’s venture into the stock market and its associated corporate form was largely a consequence of the Self-Strengthening Movement following the defeat in both Opium Wars (1839-42 and 1858-60) to Britain and France (in the second Opium War). The wars taught the Chinese elite a lesson that China was far behind in military technology and that in order to win over the West and regain national pride, China must catch up with western military and industrial technologies. But, adopting such technologies and developing the necessary manufacturing infrastructure required much capital, large sums of capital. Yet, at the time the Qing government was financially constrained. The state would not have the needed resources to take on the projects directly. The financing challenge was therefore daunting. Note that after losing the first Opium War in 1842, China signed the historical Nanking Treaty with Britain. As part of the agreement, China agreed to open five port cities 4 See Table 1 of Goetzmann and Jorion (1999) for a more complete list of stock exchange starting times around the globe. 5 See von Glahn (2005). 4

for foreign trade, including Shanghai, Guangzhou, Xiamen, Fuzhou and Ningbo. In the following two decades, British merchants and other nationals moved into the different foreign settlements or concessions in Shanghai. as noted above. in the 1860s. founders of several foreign-registered joint-stock corporations(such as HSBC, the Union Steam Navigation Co the Shanghai Steam Navigation Co., and Trautmann Co were able to raise capital by issuing publicly tradable shares to private investors. These examples of stock trading brought to Shanghai by westerners provided a timely idea to the on-going post-war debate in Ch at is, you can raise funds through issuing public shares to a large number of investors. It made many Chinese intellectuals and policy advisors conclude that industrial technology and financial technology are what allowed the West to be more powerful As one of the leading voices at the time, XUE Fucheng(1838-1894), commented, The essence of the joint-stock corporation is to make a nation rich and powerful .. If a country does not pursue joint-stock companies, its industry cannot prosper nor can its commerce:If Chinas industry and commerce do not prosper, China will not be rich nor powerful. "Where foreign firms are present, there are corporations raising capital from hundreds or even thousands of shareholders. Backed by plenty of financial resources, no wonder they are so powerful and hard to compete with. This is truly an unprecedented historical change in business. In 1868, an 1854 Yale College graduate(also the first Chinese student who ever graduated from an American university ) Yung Wing, proposed to the then governor-general of Liangjiang, ZENG Guofan, to adopt the joint-stock corporate form and start a Chinese-owned navigation company. That idea was well received by the Qing mandarins. China was thus on its way to experiment with the modern corporation and make its shares tradable. But, how could this be done? The modern corporation has three defining characters. First, it is a"legal person with the same ability to do business and engage in contracting as a real person. Second, it can issue tradable shares to any number of investors. Third, the investors face limited liability (i.e, they could lose no more than their initial investment). At the heart of the modern corporation is the separation between ownership and control, that is, thousands of outside 6 Quoted from page 271 in Li(2002)

for foreign trade, including Shanghai, Guangzhou, Xiamen, Fuzhou and Ningbo. In the following two decades, British merchants and other nationals moved into the different foreign settlements or concessions in Shanghai. As noted above, in the 1860’s, founders of several foreign-registered joint-stock corporations (such as HSBC, the Union Steam Navigation Co., the Shanghai Steam Navigation Co., and Trautmann & Co.) were able to raise capital by issuing publicly tradable shares to private investors. These examples of stock trading brought to Shanghai by westerners provided a timely idea to the on-going post-war debate in China, that is, you can raise funds through issuing public shares to a large number of investors. It made many Chinese intellectuals and policy advisors conclude that industrial technology and financial technology are what allowed the West to be more powerful. As one of the leading voices at the time, XUE Fucheng (1838-1894), commented, “The essence of the joint-stock corporation is to make a nation rich and powerful … If a country does not pursue joint-stock companies, its industry cannot prosper nor can its commerce; If China’s industry and commerce do not prosper, China will not be rich nor powerful.” “Where foreign firms are present, there are corporations raising capital from hundreds or even thousands of shareholders. Backed by plenty of financial resources, no wonder they are so powerful and hard to compete with … This is truly an unprecedented historical change in business.” 6 In 1868, an 1854 Yale College graduate (also the first Chinese student who ever graduated from an American university), Yung Wing, proposed to the then governor-general of Liangjiang, ZENG Guofan, to adopt the joint-stock corporate form and start a Chinese-owned navigation company. That idea was well received by the Qing mandarins. China was thus on its way to experiment with the modern corporation and make its shares tradable. But, how could this be done? The modern corporation has three defining characters. First, it is a “legal person”, with the same ability to do business and engage in contracting as a real person. Second, it can issue tradable shares to any number of investors. Third, the investors face limited liability (i.e., they could lose no more than their initial investment). At the heart of the modern corporation is the separation between ownership and control, that is, thousands of outside 6 Quoted from page 271 in Li (2002). 5