Stock Exchange in China

Introduction The stock exchange market in China has developed rapidly since the early 1990s. In 2007, the Chinese stock market overtook the Japanese market in terms of capitalization and topped the world in initial public offerings, underlining the dramatic surge in the country’s financial sector. Nonetheless, within one year the Chinese stock market plunged to less than a third of the value it held at its peak. This marks the most rapid decline of any major market in the world, even against the backdrop of a global financial crisis. The high level of volatility and the rapid growth of the Chinese stock market have attracted numerous studies that have focused on market operation and efficiency. In this paper, I will focus a study on two stock exchange market in China.
Financial reform and the need to establish a stock market in China
China began its reform programs at a particular moment under a unique economic history and was able to develop its own distinctive approach to financial development and financial reform. In China, the banking sector replaced the government fiscal sector in the mid 1980s as the main source of long-term funds. However, a high level of bad debt, which reached 20% of total loans by the end of 1994, persisted throughout China during this period.The banking sector, which was required to improve asset-liability management after the implementation of the Commercial Banking Law effective 1 July 1995, had a very small margin to meet increasing demand for long-term funds. Moreover, by the early 1990s the liabilities of state-owned enterprises (SOEs) reached a very high proportion of total asset value. Consequently, not only did many SOEs face debt-servicing problems, but they also experienced severe working capital shortages. Largely this situation was attributable to the lack of flexible fundraising channels. China, therefore, must give higher priority to the stable supply of long-term funds through the stock market.

There are two stock