A Crash Is China’s Chance for Reforms

After spectacular growth over two years, China’s stock market has slipped into correction mode. “Because the Chinese government has been perceived as an active promoter of the country’s stock market, tens of millions of individual investors, members of the privileged urban middle-class, will direct their ire at the government,” writes Minxin Pei and Wayne Chen, researchers with the Carnegie Endowment for International Peace. The Chinese government should resist calls to bail out investors who made bad decisions, but also swiftly punish fraud, using any proceeds to improve regulatory programs for monitoring the securities industry. To restore public confidence in the stock market, Chinese officials should reform corporate governance and increase transparency. Pei and Chen also suggest allowing foreign members to serve with the China Securities Regulatory Commission and allowing foreign brokerage firms to participate in China’s market without forming joint-venture partnerships with domestic firms. Diversity in players and supervisors could deliver fairness and openness to the Chinese market. – YaleGlobal