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The significance of China’s development reaches far beyond the country’s domestic concerns. This is due to a variety of factors, among them the country’s rapid growth and development and its increasingly open borders, allowing it to become a member of the regional and international community of states over the last twenty-five years. China is not a major force yet, but its voice is gaining influence. Simultaneously, its development on domestic, regional, and international levels is a huge uncertainty which inheres both potential and risk and is likely best described by the title of Johnny Erling’s book (China — the Great Leap into the Unknown). Thereby, the attempts to understand the relevant processes and related prospects often appear to be an endless puzzle which allows for further insight with every piece that can be added, while a certain dimension of mystery remains as China develops further.

In conjunction with development, assuring stability () and welfare () have been viewed as imperatives by rulers throughout China’s history and remain so in the rationale of the Chinese Communist Party, which has had to contend not only with social disorder, but also with loss of credibility during periods of its reign. With these imperatives in mind, the Chinese government initiated an unprecedented path of reform in 1978 which has had a substantial impact on literally every aspect of society as well as the country#x2019;s foreign relations. Viewed pragmatically, this has brought about the world#x2019;s fastest growing economy and has at the same time — when evaluated in the overall perspective — yielded substantial material benefits for its population. However, the road towards development remains fragile. It presents significant economic and political challenges and also has troubling implications for both society and the natural environment. These are by no means insurmountable obstacles, but they need to be overcome. Successful economic growth is considered to be the pivotal means necessary to guarantee social stability and welfare, but more recently the government has also increasingly acknowledged the need to incorporate aspects related to quality and sustainability into its growth targets.

Casual observation suggests that an efficient financial system is one of the salient prerequisites promoting a country#x2019;s effective development and competitiveness, or as in the case of financial system distortions, a major impediment. Among the components advancing a country#x2019;s welfare, capital allocation, intertemporal smoothening, and risk sharing are continuously cited. Conversely, market losses at major stock exchanges at the beginning of the new millennium demonstrated the potentially volatile impacts of financial systems on development and challenged economic policies on national and international levels. Several diverging theoretical concepts and empirical studies have investigated whether a nexus between finance and economic growth or finance and economic development actually does exist. Yet, the main focus of research has been to analyse the impact of the finance sector on growth or on economic development, and in particular, the role of banks and stock markets therein. Other aspects, albeit they could be considered important for an overarching development point of view, have been only partially included, among them the versatile reciprocal relationship of finance and development and a capital market perspective covering both stock and bond markets. The main obstacle to constructing a comprehensive model of the finance-growth or finance-development linkage consists of the complex causalities between finance and economic activity, not to mention the broader scope of developmental approaches that integrate social and environmental dimensions.

At first, the formation of the People#x2019;s Republic of China resulted in a halt of capital market activities. The remaining stock markets in Beijing and Tianjin stopped operations in 1952 and national government bond issues were discontinued after 1958. This part of the financial system was considered a capitalistic element and could re-emerge only gradually during the 1980s in a rather unregulated environment. The first bond was issued in 1981 and the two stock markets were established in 1990 in Shanghai and 1991 in Shenzhen. To date, these are the only officially approved domestic stock exchanges. The sole reason for this development was that the capital required for economic development could not be mobilised through other channels by the government to a degree deemed satisfactory. This constituted a tremendous step for China, but the Chinese capital market was still far from a form that would measure up to international standards in terms of market composition and performance at the time. For one, the capital market development had to be aligned with the prevailing political ideology, which often afforded flexibility in various ways. Similarly, capital market instruments had to be extended and advanced in steps from the ground up, while adhering to the particular Chinese political and economic context. To give an example, shares and bonds were rather similar in the 1980s in that shares frequently had been provided with a guaranteed return as well as a guaranteed repurchase after an agreed time, whereas dividends — if provided at all — were commonly not dependent on annual profit or loss. Nonetheless, the capital market has evolved over the years, with promising, shaky, and troublesome phases. Additionally, the capital market has played a role in generating a sense of professionalism in financial services that is now very different from the phase prior to the start of the reforms at the end of the 1970s.

After having investigated the current state of China’s capital market, it is necessary to examine which influential parameters might cause a certain type of change in capital market performance, regardless of direction or outcome. This is of particular concern for both capital market participants and those who focus on developing appropriate measures for capital market enhancement in order to increase awareness of potential shifts and recognise tendencies current. As James A. Ogilvy, Peter Schwartz, and Joe Flower have emphasised, “China is a complex adaptive system with billions of variables. We cannot know its future. But we can analyze its present, searching for the deep drivers that are most likely to shape its future.” The scores of individual variables, however, underlie developments themselves and vary in terms of their importance for capital market performance over time. Therefore, single variables are not examined. Instead, parameters with potential to influence the capital market are considered in the broader spectrum, as was delineated in Chapter 3.3.5.2. These actually entail the numerous variables and allow for observing changes of variables and interactions between them in a wider context which is vital for a precise understanding.

In March 2005, various experts from a range of fields were invited to participate in a survey on which was conducted at the Department of Banking and Finance of the Philipps-University of Marburg, Germany. This poll had the objective of further enhancing insight into China’s capital market performance and its influential parameters by investigating the appraisal of professionals working in the realms of the financial system and/or broader development-related issues. In conjunction with this, it referred to the current capital market’s contribution to effective development and its potential to do so in five and ten years, including a look at realms influencing the capital market. The objective furthermore included a comparison of the results achieved with the conclusions arrived at in Chapter 4 and Chapter 5, which are based on academic research. While this approach is conducive to a deeper understanding of relevant processes and coherences, it needs to be kept in mind that the survey outcome presents the aggregated opinion of the particular group attending at the specific time of the survey. The questions as such and the results are of value for calling attention to matters of importance and fields of further research interest, but they do not present a universally valid picture of capital market performance in China over time. This said, the following section addresses the details of data acquisition (Chapter 6.1) and presents the results achieved (Chapter 6.2).

The objective of this work, as stated in Chapter 1, is to examine the extent to which China’s capital market can contribute to financing development in China by looking at its performance and influential parameters and indicate implications for further development. Chapter 2 has delineated the importance of effective development for China, which needs to include broader development goals, such as welfare and quality of life, in order to allow for further advancement. Thereby, the development path has reached a crucial point, in that a number of challenges have to be resolved effectively in the near future. In this connection the historical background outlined in Chapter 2.1.2 is of particular interest for this period, namely the Song Dynasty, in which China experienced a period of stagnation, and as a result the loss of its position as one of the most sophisticated countries worldwide. Today’s international balance of power in the fields of political and economic strength would most likely look very different indeed, if China at the time of the Song Dynasty had converted its development potential into practice. Whether China’s present efforts to become a major force in the community of states on regional and global levels can in fact be realised, depends largely on the success with which it masters its current development challenges.