Chinese Capital Market: Equity Fragmentation and Liquidity Transformation

Author: Wu Xiaoqiu
Publisher:
Publish Date: 2004-04-01
Features: From a structural and functional perspective, China's capital market has long been in an abnormal state. This structural and functional abnormality was initially masked by the rapid scale expansion of the market during its early stages. In recent years, with the market-oriented reforms and internationalization process of the capital market, this imbalance in structure and function, which was previously concealed by the simple scale expansion in the early stages of market development, is becoming increasingly apparent and has become the main obstacle to the development of China's capital market. The structural and functional imbalance or abnormality in China's capital market has a fundamental institutional cause: the fragmentation of equity liquidity, where the two types of equity held by non-tradable shareholders and tradable shareholders are heterogeneous in terms of liquidity. Regarding the fragmentation of equity liquidity, it is necessary to acknowledge its historical inevitability on one hand, while on the other hand, it is essential to deeply recognize that the existence of this phenomenon has created severe institutional barriers to the development of the capital market. To establish a fair and predictable institutional foundation for China's capital market, creating a market with good liquidity and a market-oriented platform requires the sole solution of advancing the transformation of equity liquidity, constructing a fully tradable market, and forming an equity structure with aligned interests.