The Evolution And Political Roots Of The Regulatory Structure Over Chinese Modern Stock Market In Shanghai

The historical experiences of stock markets around the world and a considerable body of theoretical research have suggested that the optimal regulatory structure should be a check-and-balance mix among the four regulatory tools: market discipline, rule of law, administrative measures and state ownership in the industry. However, China' s modern regulatory practices of stock markets have substantially deviated from this optimum model, that is, administrative measures and national ownership have been heavily emphasized relative to market discipline and the rule of law. Even if we take a long-term perspective into the stock market history from the 1840s, administrative powers almost always played the central stage role, alongside the occasional regulatory cycles.Why is this type of inefficient regulatory framework in China so persistent? This paper analyzes in detail the historical evolution of Chinese stock market in Shanghai during 1873 to 1949 and proposes a new political economy paradigm to explain it.Free stock markets, as a strong and effective mechanism of resource allocation, will bring huge wealth to the entrepreneurs and increase the political influence of financial capitalists, but at the same time weaken the ability of the centralized government to utilize financial capital and realize its own policy goals to strengthen its political authority. The conflicts between the well-developed interest groups (such as listed companies, brokerage firms, and investors) and the government on how to organize and regulate the stock markets will eventually emerge. It's the conflict of interests and difference of powers between the interest groups of stock market and the administrative agencies that shape the unique regulatory structure of Chinese stock market since the 1840s.This paper makes three new contributions to the existing research. Firstly, the comprehensive evolutionary path of regulatory structure over the Chinese stock market since the mid 19th century is described in detail in this paper, especially on the fall of stock market interest groups and the rise of government-led regulatory structure.Secondly, the regulatory structure of stock markets should have two different aspects: one is about the rule on the paper, and the other is the supportive interest groups for the rules. Building a strong stock market requires both the establishment of a series of regulatory institutions and the supportive interest groups. The dilemma is between a co-operative stance when the well-developed interest groups can not only assist the government to regulate the stock market, but also carry out some constraints to the behaviors of the government itself.Thirdly, this paper provides a new political explanation on the unstable interactions between the supportive interest groups of stock markets and the centralized government that give rise to the government-led regulatory structure, compared with the traditional perspectives on this issue such as national ideological factors, crisis shocks, and learning from the international experiences and models.