1. Describe the conditions necessary to develop a stock market in an emerging economy.

2. How do these conditions compare to the situation in China?

3. How likely is China to develop a stock market with fair trading? Why do you say so?

4. Outline a plan of reforms necessary to achieve stock market development in China.

MINI CASE 

What conditions are necessary to develop an efficient stock market with fair trading? What role does accounting and financial reporting play in stock market development? Consider the case of China:

Those Chinese who think of themselves as street-smart tell a joke about three fools. The first is the boss who plays around with his secretary and ends up her husband. The second is the investor who plays the property market and ends up a homeowner. And the third is the punter who plays the stock market and finds himself a shareholder. This sums up the culture of China’s fledgling capital markets. “Trading, not ownership,” is the approach of China’s investors, says Anthony Neoh, a former head of Hong Kong’s Securities and Futures Commission who is now the chief outside adviser to China’s regulatory body.

“That’s what we need to change.”

This marks a shift in China’s capital market reforms. So far, Beijing has focused almost entirely on the “supply side” of the securities market. This has included listing more, and better, companies, and forcing them to adopt better standards of corporate governance and disclosure. Such efforts have a long way to go.