The dual role of the government: securities market regulation in China 1980‐2007
| Published date | 11 May 2010 |
| Date | 11 May 2010 |
| DOI | https://doi.org/10.1108/13581981011034014 |
| Pages | 158-177 |
| Author | Jingyun Ma,Fengming Song,Zhishu Yang |
| Subject Matter | Accounting & finance |
The dual role of the government:
securities market regulation
in China 1980-2007
Jingyun Ma, Fengming Song and Zhishu Yang
School of Economics and Management, Tsinghua University,
Beijing, People’s Republic of China
Abstract
Purpose – The purpose of this paper is to examine the evolution of China’s securities market
regulation from 1980 to 2007 and the dual role of the government in this process.
Design/methodology/approach – When the government is simultaneously the owner and
regulator of the securities market, the evolution of securities market regulation follows a path of
compulsory institutional change. China’s Government authorities have played a dual role in this
process by acting both as the securities market regulator and the controlling owner of the stock
exchanges. The paper uses the evolution of China’s securities market regulation from 1980 to 2007 to
illustrate this theoretical framework.
Findings – Using the case of China, this paper provides unique evidence of how securities regulation
evolves in response to government direction and supervision if the government is both the owner and
the regulator of the securities market.
Originality/value – The paper offers insight into issues of securities market regulation in China and
other emerging markets.
Keywords Securities markets,Regulation, Organizationalchange, Government, China
Paper type Research paper
1. Introduction
Securities regulation is defined in a broad sense as government intervention aimed at
coping with failures in securities market by means of laws, economic policies,
administrative orders, and self-regulation. According to studies carried out on the
regulationof securities marketsfrom an institutionaleconomics perspective,such as Kahn
(1970), Stigler and Friedland (1962), Stigler (1964, 1971) and Peltzman (1976, 1993),
securities market public regulation is a necessary and efficient method of dealing with
“market failures”if regulatory activities are properly defined and effectively carried out.
Based on these studies, we conceive that the role of thegovernment in securities market
regulation is to complete the market, as opposed to stepping into the shoes of market
participantsto an excessive extent.Therefore, the subtleand delicate relationshipbetween
the “government”as the regulator andthe “securities market” asthe means of exchange is
the key for institutional choices in securities market regulation (North, 1990).
In spite of this, all existing studies on this topic make an implicit assumption: that
the government and the market are independent from each other in terms of ownership
and property rights. Consequently, the theories put forward in these studies cannot be
applied directly to China, because the government has played a dual role in China’s
securities market since 1980, acting as both the owner and the regulator of the market.
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1358-1988.htm
This research is supported by grant from NSFC (Project Number 70671060).
JFRC
18,2
158
Journal of Financial Regulation and
Compliance
Vol. 18 No. 2, 2010
pp. 158-177
qEmerald Group Publishing Limited
1358-1988
DOI 10.1108/13581981011034014
Stock exchanges can be considered to represent the “securities market,” in terms of
their information exchanging and resource allocating functions. If, as has been the case
in China since the economic reforms of the 1980s, the stock exchanges are owned by the
government, the government becomes both the owner and the regulator of the market.
That is to say, the basic assumption of existing theories that the government and the
market are independent of each other is not applicable in China, as the securities
market is largely owned by and highly dependent on the government, as is shown in
Figure 1.
We propose the following theoretical hypothesis:
H1. When the securities market is not independent from the government in terms of
ownership, or rather, when the government is simultaneously the owner and
the regulator of the securities market (the stock exchanges), securities market
regulation will follow a pattern of compulsory institutional change (with a
government-oriented focus) rather than follow a market oriented, responsive
pattern of institutional change, which is driven by market demand.
In this way, we seek to contribute to existing theories by introducing a new framework
in which the relationship between the government and the market is interdependent in
nature. We also illustrate and explain several aspects of the evolution of China’s
securities market regulation under this new analytical framework. This paper provides
unique evidence on securities market regulation in an emerging market in which the
government is both the owner and the regulator of the securities market.
Although the regulation of China’s securities market has featured evolution and
institutional change, it has always followed a government-controlled compulsory path.
This compulsory institutional evolution has determined that China’s stock exchanges
are quite different from exchanges established in response to market dealer’s demand in
the major financial markets around the world. China’s stock exchanges are funded by
government expenditure and form part of a strong, government-controlled regulatory
system. Not at any stage have they been real market organizations in the civil law sense.
In later sections, this paper investigates the governance structures of China’s two stock
exchanges and explains why they feature neither membership governance nor corporate
governance. They act more as executive organizations of the government regulatory
authorities. This functional ambiguity of China’s securities exchanges has led to their
failures in securities market supervision, a role that should normally be played by
market-driven exchanges accountable to the market in a real sense. To a certain extent,
this is the root cause of the damage that has occurred to investor interests.
Our paper proceeds as follows. Section 2 reviews the existing literature on securities
market regulation and discusses our contribution. Section 3 explains why we chose
Figure 1.
The dual role
of the government
The regulatory authority The stock exchanges
Government Securities market
Regulate
Owned by
Both owner and regulator
Securities market
regulation
159
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