Loss Of Function Of The Chinese Stock Market And The Radical

In 1990, when the stock market in China was established, its was artificially designed to help to solve the financing and transition problems of state-owned companies. At the beginning, those artificially designed functions accelerate the development of China' s stock market, which made it a very important part of China' s capital market later. However, along with further development of the stock market, especially the geometric expansion of participated investors, it becomes improper to artificially limit the functions of stock market like these.In this paper, a model is constructed and a thorough investigation was led on the functioning of stock market. It finds that the initial function of stock market is to improve transaction efficiency and to lower transaction cost which are so essential that seldom can anyone believe they are necessary. Other publicly accepted essential functions of stock market include: financing, resource allocation, corporate governance, economic development, etc. The investment function of stock market is omitted. After reclassification, I define investment, financing, resource allocation as the basic function of stock market, while others are classified as derivative functions.The three defined function is interactive and could not be isolated from each other. Only a stock market is valuable enough can it be attractive to absorb social investment, and then the financing function can be accomplished. And at the same time, those companies who have successfully been financed provide investors plenty of investment opportunities. With the inter-effects of the two functions, the resource allocation function can be accomplished, which is treated as the ultimate goal to establish stock market.The investment function is the prerequisite of the accomplishment of other essential functions. It can be achieved through capital motivation and value motivation. While capital motivation could not be sustainable, value motivation is the ultimate determinant factor, which in turn is determined by the intrinsic value of publicly traded company. There are two ways to improve the intrinsic value of a company: one is to improve the profitability and sustainable development of the company, the other is to protect the welfare of the company from being "stolen" by its controllers. After the investigation of two models, I conclude that separation of the equity shares, which mean shares of controllers could not be publicly traded, is the fundamental reason that causes the inefficient of stock market.Existing problems now in Chinese Stock Market reflect perfectly the above theory. Financing function in Chinese Stock Market is generally considered to be perfect. While through deep research, you may see that up till October 2003, the financing ability of stock market has been shrinking greatly, which evidenced a serious malfunction. In addition, the stock market fails to allocate resources properly. A core reason for the lack of these two basic functions lies in the fact that majority shares held by controllers are not authorized to trade publicly and thus leads to inefficiency of investment function.This paper first traces back origin for non-publicly traded shares, then analyses the fundamental interest difference for public investors and controllers through an observation on interest formation and behavior mechanism on the controllers side. This also explains lack of functions of all sorts in this market. Finally it reaches a conclusion that the road to a perfect market functioning is paved with free and complete liquidity of all shares.After a comparison of all prevailing proposals, I found out the key argument in full-liquidity is the valuation of non-publicly traded shares. This means to find a market price that would be acceptable to all parties. Consequently I put forward my solution to solve the problem: reimbursement for full-liquidity, i.e. setting the price for a fully liquid stock by the market force while the price spread between this new price and the former price paid by public investors w...