Unraveling China\u27s Capital Market Growth: A Political Economy Account

With modern, successful firms that operate globally and a capital market that is the second largest in the world, corporate governance in China has long passed the point of an “adjust or perish” prognostic. Yet its firm governance and capital market functions maintain strong idiosyncrasies that go against many fundamentals in economics and legal thought. These idiosyncrasies are products of the underlying configurations of China’s political economy and the shifts within it. Political economy in China has a determinant role on the ways corporate ownership is organized, firms operate, and the capital market functions. It is responsible for many of the infirmities in the Chinese market, yet at the same time also holds the key to China’s puzzling growth. Inspecting China’s development conundrum through a political-economic lens reveals that there is a parallel governance system at work in China that is distinct from the legal or administrative governance system advanced by the state. This parallel system is actively present at every level of society, the administrative state, and the economy. Likewise, it has governance oversight, participation, and accountability functions at the individual enterprise and business group levels, by which it impacts upon the behavior of firms and their insiders. Political institutions supplant many of the oversight functions traditionally provided by firm internal-governance bodies. Political institutions also supply external monitoring and accountability, buttressing legal enforcement and the monitoring functions of weak markets. In doing so, this politicized corporate governance system credibly signals the regime’s commitment to growth and provides assurances against various forms of investor abuse. These assurances, despite their political nature, seem to reduce the cost of capital and attract external finance, thereby supporting the growth of firms. China’s political economy, therefore, supports firms and capital market growth in ways that go beyond developmental industrial policies and the attributes associated with state-controlled economies (such as state capture by cronies, fostering connections with entrepreneurs, largesse, and protectionism). It produces a novel form of governance that mobilizes political and economic incumbents to advance reforms and to curb their own abusive behavior. This resolution for China’s law and capital market development conundrum brings forth new possibilities on the menu of what is now an obsolete convergence/path-dependency discourse. The politicization of corporate governance not only counters convergence predictions in showing how systems can “diverge back”, in form, but also challenges path-dependence theories in showing how systems evolve, in function, even within fixed institutional confines. China’s capital market development compels us to view development as an iterative mode of constant change