Chinese Capital Markets During the Past Three Decades: editor's note

After the establishment of the People's Republic of China (PRC) in 1949, the development of capital markets was suspended due to the planned economy in China, with the government directly setting interest rates and allocating funds by administrative means. At the end of the 1970s, the economic reform and opening-up policy promoted the initialization of China's capital market. The demand for capital by enterprises has become increasingly diversified, and most enterprises can no longer obtain money from the state, thus promoting the revival of capital markets in China (China Securities Regulatory Commission 2012). The re-birth of the stock market in 1990 marked the beginning of China's contemporary capital market. The market of government and corporate bonds also re-emerged in the 1980s and gradually grew in the 1990s. China's capital markets have shown a gradual feature of “double-line transformation and gradual deepening.” The fund-raising activities required by the non-state-owned economy led to the emergence of a market fund track outside the planned track. According to Cao (2018), the Chinese capital markets have experienced the following four stages. The first stage, from 1978 to 1993, saw the emergence of joint-stock enterprises and the spontaneous development of capital markets aiming at raising funds. The market was fragmented and chaotic with minimal regulatory supervision. China's capital markets mainly included the stock market, bond market and investment funds market. On December 5, 1986, the State Council announced the “Provisions on deepening the reform and enhancing vitality of enterprises” (China Securities Regulatory Commission 2008). The provisions allowed enterprises to carry out shareholding system pilot projects, and a primary market for shares emerged. The trial of the shareholding system in the 1980s also gave birth to various forms of securities, including government bonds, corporate bonds, and financial bonds. At the end of 1996, the Central Registration Depository Agency was established, helping the bond market enter a period of rapid development. In March 1998, China started the pilot offering of investment funds (Liu et al. 2012). During the second stage, from 1993 to 2003, the capital market moved from decentralization to unification. The regional capital market, which was characterized by the establishment of the Shanghai and Shenzhen Stock Exchanges in 1990, developed into a national capital market. The establishment of China Government Securities Depository Trust & Clearing Co., Ltd. in 1996 ensured a national unified bond custody and settlement system. The China Securities Regulatory Commission was established in 1998 to oversee Chinese securities and futures industry. In the third stage, from 2003 to 2008, capital markets developed in accordance with international practices and regulatory standards. The bond issuance system was changed from an authorized system to an approval system. The split-share structure reform was implemented to resolve the issue of non-tradable shares. The fourth stage is from 2008 to the present. The outbreak of the international financial crisis in 2008 intensified challenges faced by Chinese capital markets such as risk prevention and financial innovation, which led to a series of reforms including the reform of the registration system. China's capital markets have become more integrated into the global capital market (Wu et al. 2022). In summary, over the past three decades, the Chinese capital market has evolved from a single market to a multilevel capital market, from serving merely state-owned enterprises to serving small and medium-sized enterprises and scientific and technological innovation enterprises. Chinese capital markets have experienced rapid growth in tandem with its economic reform and opening-up policy since the early 1980s, especially after the establishments of the Shanghai Stock Exchange and the Shenzhen Stock Exchange at the end of 1990, and now ranks as the second largest stock market in the world (Han et al. 2018). Research on Chinese capital markets has surged since the early 1990s, mirroring the rapid growth of Chinese capital markets in the past three decades. To shed light on the status of research on Chinese capital markets, we collect papers in English published in SSCI journals from Web of Science Core Collection (Social Sciences Citation Index) during 1991–2021. We impose the following additional filters to identify papers on Chinese capital markets: (A) paper title includes any of the keywords China, Chinese, Shanghai, Shenzhen, and Beijing; (B) articles falling under the Business, Business finance, or Management categories.1 We obtain a total of 11 987 articles published in 398 SSCI indexed journals from 1991 to 2021,2 including 1155 papers in the Financial Times Top 50 journals (FT50 journals hereafter). Figure 1 shows the yearly distribution of SSCI journals and papers on Chinese topics during 1991–2021. We find that the number of journals (papers) covering Chinese capital markets has increased from 4 (4) in 1991 to 39 (86) in 2001, 139 (443) in 2011, and 238 (1638) in 2021, showing a sharp increase in the recent decade. The top three journals with the largest number of China-related papers are Emerging Markets Finance and Trade, Chinese Management Studies, and Pacific-Basin Finance Journal. There are 20 journals with more than 100 articles on Chinese capital markets. When comparing the number of articles published during 2011–2021 to those published in 1991–2021, it is worth noting that the majority of articles were published in the last decade. Among the 752 papers published in FT50 journals in the last decade, 212 articles are published in the Journal of Business Ethics, followed by 48 articles that are published in Research Policy. The number of articles published in FT50 journals generally increases over time, with more journals devoted to Chinese topics. Journal of International Business Studies and Management Science, the two FT50 journals with sufficient exposure to finance and accounting topics, have published 42 and 22 papers on Chinese topics, respectively. All the Top 4 finance journals and Top 5 accounting journals have published papers on Chinese topics, with The Accounting Review, Contemporary Accounting Research, Journal of Financial Economics and Review of Financial Studies leading the tide. Han et al. (2018) review 436 accounting and finance papers on Chinese capital markets published in Tier 1 journals and Asia-Pacific regional journals from 1999–2018. Liu and Wang (2018) review 20 185 articles in the field of finance, regardless of geographic focus. Our sample is broader and more comprehensive in covering international research related to Chinese capital markets. Asia-Pacific Journal of Financial Studies3 (AJFS) became the first finance journal published in the Asia-Pacific region covered by the Social Science Citation Index (SSCI) in 2006. The coverage of Chinese capital markets in AJFS has increased rapidly in recent years. This special issue invited both empirical and theoretical papers in finance related areas, with a special focus on recent developments in Chinese capital markets, which has become a G2 economy during the last 40 years. We have received 44 submissions and selected 7 to be included in this special issue. We briefly discuss each of the articles in this special issue and its implications on Chinese capital markets. In “Executive Financial Literacy and Corporate Performance: Evidence from Small and Medium-sized Enterprises in China,” Shuyuan Zhou, Guangning Tian, and Yawei Qi analyze the relationship between executive financial literacy and the performance of Chinese small and medium-sized enterprises (SMEs). They find that executive financial literacy improves corporate performance, especially for companies with weak external supervision and low competitive pressure. Further analysis shows that executive financial literacy improves corporate performance by alleviating corporate financing constraints and improving corporate risk management. The findings have important policy implications for stimulating corporate growth and promoting high-quality economic development. Future research may explore other executive traits that might be correlated with firm performance. In “Media Coverage and Labor Investment Efficiency: Evidence from China,” Tingwei Li, Jin Liu, and Lei Wang find a significantly positive relationship between media coverage and labor investment efficiency based on both newspaper and online media coverage of Chinese firms during 2006 to 2019, especially for firms with higher labor cost stickiness or when human capital is more important to a firm's business model. Mechanism analysis reveals that media coverage improves labor investment efficiency through a compensation incentive mechanism, supervision mechanism, and information disclosure mechanism. This study provides novel evidence on the role of media coverage on labor investment in transitional economies, enriching the literature regarding the real effects of media coverage. It also contributes to a broader research that investigates determinants of labor investment. In “Does Information Disclosure of Capital Use in Prospectuses Affect IPO Initial Underpricing?,” Zhongguo Zhou and Wenxiu Tang study the impact of intended use of proceeds disclosed in prospectuses on ChiNext IPOs' initial underpricing. They find that the overall information disclosure in the “Use of Proceeds” section and the intended use of IPO proceeds affect initial underpricing. To deal with the major changes in rules and regulations for ChiNext IPOs, they split the entire sample into two non-overloading sub-periods: the first sub-period from the inception of the ChiNext board from October 23, 2009 to December 31, 2012 and the second sub-period from January 1, 2014 to December 31, 2019. They find that the proceeds raised for IPO firms' information platform and research and development over the second subperiod, whereas the proceeds to promote marketing and sales and expanding existing products over the first sub-period are related to initial underpricing. The results suggest that investors tend to value investment opportunities disclosed in IPO prospectuses differently over time as society and technology advance. In “One Country, Two Calendars: An Examination of China's A-share Stock Market,” Qianqiu Liu, Xiaobo Liang, and Allan Zebedee examine the January effect in China's A-share stock market from January 1995 to December 2019 using both the solar and lunar calendars. They find the absence of a traditional January effect in the solar calendar but a strong January effect in the lunar calendar, with much stronger effect in small firms. The tax-loss selling and window dressing hypotheses cannot explain the turn-of-the-year effect in China. Instead, the turn-of-the-year effect in trading volume and buy orders explains the strong lunar January effect. The authors find no evidence of the lunar January effect in the B-share market that is predominantly composed of foreign investors. These results show that Chinese financial markets are more closely aligned with the traditional lunar calendar than the standard solar calendar, suggesting the important role of traditional culture toward a deeper understanding of the stock market in China. In “Volatility Spillovers among the Three Places across the Taiwan Strait: Evidence from a BEKK-CARR Approach,” Wen Xu and Chunchou Wu introduce a new BEKK-CARR model to explore the volatility spillover effects among mainland China, Hong Kong, and Taiwan stock markets during the COVID-19 pandemic. They show that the trading information flow among these three markets has changed significantly due to the event of the COVID-19 pandemic. The strength of volatility spillover increases throughout this time period. The Hong Kong stock market plays a pivotal role in volatility transmission. The values for half-lives by exogenous shocks keep relatively low during the pandemic period. A potential explanation is that the trading information transmission among stock markets is quicker than in the non-pandemic period. These results suggest that the COVID-19 pandemic has significantly accelerated the trading information flows in the Greater Chinese Area. In “Government–Business Relations and Corporate Cash Holdings: Evidence from China,” Yu Gao, Yan Cai, Zhuoqi Teng, and Yuantao Fang explore how government–business relations affect corporate cash holdings of Chinese firms. They find that healthy government–business relations have a significantly positive impact on corporate cash holdings through the channel of investment opportunities. Product market competition positively moderates the relationship between government–business relations and corporate cash holdings, but financial constraints negatively moderate this relationship. This study has implications for the government to optimize the quality of governance and for enterprises to adjust their business strategies. Future studies could explore the impact of government–business relations on other corporate activities and in other countries. In “Innovation Tone and Corporate Innovation Adjustments—Evidence from China,” Pingui Rao, Zhiqiang Liu, Xinlu Wang, and Rayman Yue examine how firms alter their innovation activities in response to the tone of peer firms' discussions of innovation in their annual reports using textual innovation information in the annual reports of Chinese listed firms from 2007 to 2019. They find that a positive innovation tone in peer firms' annual reports results in a significant reduction in R&D investments by the focal firm, especially when such a tone pertains to the future. Cross-sectional analyses show that peers' innovation tone strongly affects R&D investments when the focal firm operates in a non-high-tech or highly competitive industry, or is willing to adjust its innovation strategy. These results enrich the literature on the peer effects of textual information on innovation and have implications for firms' innovation strategies. In conclusion, although the articles in this special issue adopt a variety of approaches to advance our understanding in different areas of Chinese capital markets, there are still many unexplored issues that await further exploration. We hope this special issue of the Asia-Pacific Journal of Financial Studies motivates further research in Chinese capital markets.

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