Dancing with Wolves: Regulation and De-regulation of Foreign Investment in China's Stock Market


China’s stock market is the world’s youngest one and the fastest-growing one as well. During the past decade, it has been developed with a variety of unique features, most of which are inconsistent with the concept of a viable market economy. China’s dualist regulatory regime has different sets of rules for domestic participants and foreign investors. For a long period, foreign investment in the stock market was subject to severe restrictions and effectively excluded from all market activities except in the B shares market. Fundamental changes, however, have occurred following China’s accession to the WTO, especially in the last two years. Now qualified foreign institutional investors (QFIIs) are allowed participate in the market, as are foreign firms that wish to acquire Chinese enterprises including listed SOEs. This article, after introducing China’s existing legal rules on foreign participation in the stock market, analyzes the major legal and corporate governance obstacles facing foreign investors. It concludes that, in order to achieve the ambition to make its stock market one of the most successful in the world and to meet its WTO obligations, China needs to substantially improve its regulatory and legal framework and adjust to different regulatory philosophies, including rethinking the role of foreign investors, redefining the role and functions of government with a view to providing institutions supporting the market, and creating real good corporate governance for listed companies. To achieve this, the key is to accelerate privatization, which has picked up speed in 2003.


Comparative and Foreign Law | Securities Law

Date of this Version

January 2004