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Du, Julan; Yajun, Lucy Liu; Wong, Sonia M.L. --- "Special Treatment (ST) Firms and Administrative Governance of Capital Markets in China" [2007] ELECD 242; in Eger, Thomas; Faure, Michael; Naigen, Zhang (eds), "Economic Analysis of Law in China" (Edward Elgar Publishing, 2007)

Book Title: Economic Analysis of Law in China

Editor(s): Eger, Thomas; Faure, Michael; Naigen, Zhang

Publisher: Edward Elgar Publishing

ISBN (hard cover): 9781847200365

Section: Chapter 7

Section Title: Special Treatment (ST) Firms and Administrative Governance of Capital Markets in China

Author(s): Du, Julan; Yajun, Lucy Liu; Wong, Sonia M.L.

Number of pages: 36

Extract:

7. Special treatment (ST) firms and
administrative governance of capital
markets in China
Julan Du,1 Lucy Liu Yajun and Sonia
M.L. Wong

1. INTRODUCTION

In the past two decades, the remarkable development of China's financial
markets was associated with poor formal legal institutions.2 This puts
China in sharp contradiction to the Washington Consensus which holds
that strong property rights and investor rights protection are a central pre-
requisite for financial market development. The influential law and finance
literature on cross-country studies demonstrates the importance of legal
institutions for the emergence and development of financial markets such
as formal minority shareholder,3 formal mandatory disclosure rules and
their enforcement,4 the effectiveness of legal institutions,5 and the legacy of
legal development in countries being studied.6
When we turn to transition economies, including China, we find that they
typically suffer from severe enforcement failures, which include deterrence
failure and regulatory failure. The consequences of enforcement failures for
financial market development have been identified in the literature.7 If we
were to apply the conventional logic of law and finance to the transition
economies, we would predict with much confidence that financial market
development in transition economies would be severely retarded. However,
it seems that China defies the above prediction. As the most populous and
the fastest-growing country in the world, China is too large to ignore or treat
as a negligible outlier. Then why and how did China manage to develop its
financial markets ...