Unraveling China's Capital Market Growth: a Political Economy Account
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University of Michigan Law School University of Michigan Law School Scholarship Repository SJD Dissertations Other Publication Series 2019 Unraveling China's Capital Market Growth: A Political Economy Account Tamar Groswald Ozery University of Michigan Law School, [email protected] Follow this and additional works at: https://repository.law.umich.edu/sjd Part of the Business Organizations Law Commons, and the Comparative and Foreign Law Commons Citation Groswald Ozery, Tamar, "Unraveling China's Capital Market Growth: A Political Economy Account" (2019). SJD Dissertations. This Dissertation is brought to you for free and open access by the Other Publication Series at University of Michigan Law School Scholarship Repository. It has been accepted for inclusion in SJD Dissertations by an authorized administrator of University of Michigan Law School Scholarship Repository. For more information, please contact [email protected]. UNRAVELING CHINA’S CAPITAL MARKET GROWTH: A POLITICAL ECONOMY ACCOUNT By Tamar Groswald Ozery Submitted to The University of Michigan Law School In Satisfaction of the Requirement for the Degree of Doctor of Juridical Science (S.J.D) Advisory Committee: Nicholas C. Howson, Vikramaditya S. Khanna, Curtis J. Milhaupt June 2019 © Copyrights by: Tamar Groswald Ozery 2019 All rights reserved In memory of my grandmother, Raya (Raisa) Barhovik Skutel [1915-2011], who had seen many types of regimes in her lifetime and challenged them all. T.G.O ACKNOWLEDGMENTS I owe a great deal of gratitude to a long list of friends, family members, and mentors who provided guidance and support throughout the journey of writing and producing this dissertation. I am deeply grateful to my dissertation committee members: My teacher and supervisor, Nicholas Howson, whose wisdom brought me to the University of Michigan to begin with. Nico read my work in and out and his sharp commentary helped refine my vision. This dissertation would not be what it is without his support. Vic Khanna planted the seeds for my curiosity in development theories and helped me find my way in the labyrinth of U.S. academia. Curtis Milhaupt’s scholarship shaped my development as a scholar, and his generosity reading and providing feedback on my work has been a true blessing. I am grateful to Theresa Kaiser-Jarvis, Assistant Dean for International Affairs, a friend and mentor, who supported every step of my professional advancement with buckets of reassurance and an undefeatable positivity. To Stephanie Wiederhold, Elizabeth Snook, Barbara Glispin, and Roopal Shah, for their countless interactions and assistance. I also owe gratitude to Mary Gallagher, Yuen Yuen Ang and the wonderful team at the University of Michigan Lieberthal-Rogel Center for Chinese Studies, for welcoming me as one of their own, and for providing me with an additional community to discuss my research. Finally, to my many comrades at Michigan Law SJD/RS program and their families, who made this journey meaningful on many different levels. I am deeply indebted to them all. The final steps in this dissertation were accomplished during my Fellowship at the Harvard Law School Program on Corporate Governance. I am thankful to Lucian Bebchuk for the many opportunities to discuss my work and for his general guidance. My deep gratitude to Mark Roe for the experience as a Teaching Fellow in his Comparative Corporate Governance seminar. Mark’s work and feedback had a great deal of influence over the final product. I am grateful to my mentors in Israel, Barak Medina and Assaf Hamdani, who supported me in taking on this challenge several years ago and ever since. Last but not least, for their friendship, their love, and their endless support throughout this journey, I thank my family: Ida and Shlomo Groswald, my parents, who provided constant counsel and unconditional love; Shamir, my partner, my rock; our son Negev, and daughter Gefen, both literally born into this project; Ila and Einat, my sisters; Kathy and Yefet Ozery, my parents in-law. This work is your work. 3 Table of Contents INTRODUCTION .......................................................................................................................... 1 CHAPTER 1: CHINA’S LAW AND DEVELOPMENT CONUNDRUM—A CAPITAL MARKET PERSPECTIVE .............................................................................................................................. 5 I. THE EMERGENCE OF FIRMS AND THE CAPITAL MARKET .................................................................... 9 A. The Rise of the Large (Public) Firm ............................................................................................................... 10 B. The Formation of Capital Markets (in their narrow sense) ................................................................ 23 CHAPTER 2: CHINESE LISTED FIRMS AND THE PUBLIC SHAREHOLDER “CLASS”—A STRUCTURED PREDICAMENT ................................................................................................... 29 I. A TURN TOWARD LAW AND LEGAL INSTITUTIONS—CONVERGENCE WITH CORPORATE CAPITALISM ................................................................................................................................................... 31 II. “CHINESE-STYLE” STATE CAPITALISM AND ITS CONSEQUENCES FOR PUBLIC SHAREHOLDERS ........................................................................................................................................................................ 39 A. The State as an Ultimate Controller—Consequences for Public Investors ............................... 39 B. The Party-State’s Financial and Capital Market Control ...................................................................... 49 III. ANALYSIS OF CONVENTIONAL GOVERNANCE MECHANISMS ........................................................ 50 A. Internal Governance Mechanisms .................................................................................................................. 52 B. External Monitoring Institutions ..................................................................................................................... 80 CHAPTER 3: THE GREAT REVERSAL: POLITICIZATION OF CORPORATE GOVERNANCE IN CHINA .................................................................................................................................... 106 I. POLITICAL-ECONOMY AND FIRM GOVERNANCE IN CHINA ........................................................... 107 A. Baseline Configurations ....................................................................................................................................... 109 B. Political Equilibrium Shifts Focus.................................................................................................................. 111 II. THE POLITICIZATION OF CORPORATE GOVERNANCE — LEVERS OF CCP’S POLITICAL GOVERNANCE IN FIRMS ........................................................................................................................... 115 A. The CCP’s Intra-Firm Governance Capacity: Personnel Management & Party Committees .............................................................................................................................................................................. 115 B. The CCP’s External Corporate Governance Capacity—Monitoring and Accountability through Disciplinary and Enforcement Functions ............................................................................................. 127 III. POLITICIZED CORPORATE GOVERNANCE IN CHINA—A VIABLE ALTERNATIVE? .................. 142 A. Potential Positive Effects at the Firm and Market Levels ................................................................. 144 B. Legalizing Political Institutions—Contribution to the Role of Law ............................................ 149 CONCLUSION .......................................................................................................................... 152 5 UNRAVELING CHINA’S CAPITAL MARKET GROWTH T.G.O INTRODUCTION The conventional wisdom concerning capital market development would have us believe that dispersed ownership is the superior market structure for investors, while concentrated ownership is often correlated with lower capital market growth. Similarly, privatization of public firms is viewed as a necessary step for their success and surely for their global expansion. Private ownership is perceived as one of the preconditions for prosperous firms and deep capital markets, while state ownership and political influence are deemed to be impediments. Four decades of economic development in China, however, indicate otherwise. China’s capital market growth is quite striking—a sample of three randomly selected time-points over the last decade reflects a largely constant and significant increase in capital market growth, as measured by the number of firms listed and by total market capitalization.1 Additionally, market capitalization as a ratio of GDP—an indicator that is used to assess over/under valuation of a certain market and implies investors’ confidence—has been fast increasing and stabilized positively in recent years.2 At the end of 2005, China’s stock exchanges had 1,377 public companies with a market capitalization of 401.8 billion USD at a 17.5 ratio to GDP. In 2010, the number of listed firms reached 2,063 with a total market capitalization of 4.028 trillion USD and a market cap to GDP ratio of 66. By the end of 2017, China’s capital market reached a striking 3,485 firms