Law and economic growth in China: a case study of the stock market

It is widely accepted that law is essential for economic growth. Prominent economists in China have repeatedly called for strengthening the legal system so that the economy can continue to grow. Nevertheless, the fact that China has been able to achieve rapid economic growth while the law is weak seems to cast doubt on the significance of law. It is even suggested that China is a counter-example to the importance of law and, more provocatively, it is argued that China’s economy grew rapidly not “in spite of,” but “because of,” weak law. To gain a richer and deeper understanding of law in China’s economic growth, this paper conducts a case-study of China’s stock market by examining its growth history and legal development. It is found that China has built from scratch a complex legal and regulatory system governing the stock market, which actually played a critical role in supporting the growth of the market. However, the trajectory of development was law following market growth, which was in turn caused by ideological and political liberalization. On the other hand, the market did not grow to its full potential and currently it faces serious challenges to fulfil the task of supporting the development of the economy, and the fundamental reason is political and ideological restrictions; likewise, the improvement of law for investor protection has not been sustained, for which similarly politics and ideologies offer an explanation. The experience of the stock market suggests that, while law is indispensable for sustaining China’s economic growth, political and ideological liberalization is fundamental in that it is not only necessary to free up the economy so that it can continue to grow in the first place, but also crucial to further strengthening the whole legal system.