Despite claims that China’s capital markets resemble a “casino,” China has in fact made extraordinary strides in its quest to develop stable and mature capital markets. Although the Shanghai and Shenzhen stock exchanges only opened in the early 1990s, by the end of 2004 they boasted a combined list of 1377 corporations with a total market capitalization of RMB 3.7055 trillion ($447.5 billion). Currently, China’s capital markets rank as the twelfth largest in the world.
What is most striking about Chinese capital markets is the dominance of individual investors. There are now more than seventy-two million securities trading accounts in China. At the close of 2003, of the accounts trading shares on the Shenzhen Stock Exchange, only 172,700 out of 33.21 million were held by institutional investors. Individual investors also generated more than 70% of the total trade turnover in 2003. Most of these individual investors are middle-aged individuals or senior citizens, with an average age of 43.01 years. The majority of them (86%) are low- or middle-income, and 55.63% have an annual income below RMB 20,000 ($2,418). In addition, many Chinese individual investors may lack basic financial or investment knowledge, as 43.81% of them have no higher education.
Faced with booming capital markets packed with unsophisticated individual investors, China’s securities regulators have faced tough questions about the adequacy of shareholder protections. The regulatory body adopted policies based on La Porta’s scholarship on the positive link between capital market development and public shareholder protection. As stated by Meilun Shi, former vice chairman of the China Securities Regulatory Commission (“CSRC”), “investors’ confidence and participation are critical to the healthy and stable development of China’s capital markets. They have a direct impact on the successful implementation of reform and the Open-Door Policy, as well as on social solidarity.” Since 2000, therefore, investor protection has consistently been “the top priority” of the CSRC. In January 2004, China’s State Council, in a policy declaration regarded as an important milestone in the history of China’s capital markets, reiterated that “protecting the legitimate interests of investors, particularly those interests of public investors” shall be one of the ongoing guiding principles in the reform and development of capital markets. Most recently, this principle was incorporated for the first time into the State Council’s Annual Government Work Report, which signifies the Chinese government’s determination to further protect investors.