China's Capital Market Allocation Efficiency

Capital market is a primary approach to realize efficient capital allocation. Western efficient market hypothesis(EMH?) mainly deals with the extent to which security market responds to information, and hence the so-called "pricing efficiency". It is worth noting that this hypothesis has an important implicit assumption that institution environment is constant, i.e. institution factors will not impact the operational mechanism of capital market(security market). Obviously, this assumption does not apply to the reality of China's capital market. It is understood that EMH can't fully explain issues related to China's efficient capital market allocation.This paper starts with a general overview and assessment of capital market efficiency theory and continues with the author's personal comments on efficient capital market allocation (Capital market in this paper is used in a broad sense, including middle-and long-term debt market and stock market). The present paper claims that an institution environment perspective is more realistic to analyze China's current issues of efficient capital market allocation and more illuminating to understand issues of low efficient capital market allocation in China. The main body of the present paper consists of analyzing and assessing the evolutionary process of post-openness policy China's capital market by the institution change theory in New Institutional Economics, and exploring thecurrent reality of efficient capital market allocation. It aims to suggest that imperfections of institutional environment and concomitant non-market transactional behaviors account for low efficient capital market allocation in China to a significant extent. To illustrate, the present paper develops into three specific analyses: 1) property right issues: The authorclaims that property right is the basis of the whole financial system. State-owned monopoly and nontransparent property rights are the underlying reasons for low efficient capital market allocation in China; 2) reputation issues: The absence of capital market reputation is an important manifestation of a pervasive reputation absence involved in all the socio-economic transactions. Increased transaction cost due to reputation absence gravely disrupts the transaction order of market capital, thereby depriving the role of market capital in guiding efficient resource allocation; and 3) rent-seeking issues: Rent-seeking derives from institutional imperfections and is directly related to institutions, to put it in another way, it results from excessive governmental interferences into capital market. The phenomenal rent-seeking misleads market participants in a significant way and distorts the operational mechanism of capital market. As a result, limited financial resources are heavily wasted, thereby lowering the efficiency of capital market allocation.To conclude, the present paper suggests the framework of China's capital market allocation efficiency: property right reform as a primary role, healthy social reputation system construct as a basis, and legal devices as a means to regulate and check the governmental behaviors towards capital market.