Li Daokui:
At an important meeting on May 10, I raised a sincere question. After more than three decades of rapid growth, China’s manufacturing industry has made tremendous strides globally—from electric vehicles to military fighter jets, we are now on par with or even leading the world in many areas. Yet, after 35 years, there is still a general consensus that China’s capital market is underperforming and that public perception remains negative. How should we understand this issue from the perspective of the economics of government and market? More specifically, what did we get right in manufacturing? And what has the government failed to do—or done wrong—when it comes to developing the capital market?
Wu Xiaoqiu:
That’s a very complex question. In China, it’s evident that the capital market is far behind the industrial and service economy, especially in comparison to the rapid advances in high-tech enterprises and modern manufacturing. In fact, when measured against China’s growing global influence in areas such as trade, technology, and industrial output, our capital market trails by two to three orders of magnitude.
So what’s behind this lag? I think there are several key reasons:
First, there is a cultural dimension. There is a deeply rooted cultural bias in China against making money in the capital market. Many people don’t see profits from the stock market as legitimate. That’s why someone like Warren Buffett commands great respect in the U.S., but not in China. In China, wealth from financial markets is viewed as somehow less honorable than profits from tangible businesses. This cultural perception influences our legal system, policy choices, and the regulatory architecture of capital markets.
Second, it’s an issue of institutional design. China operates under a civil law system, which has made it difficult to foster dynamic market mechanisms. Since around 2019, we’ve been incorporating features of common law systems to support capital market development—such as class action mechanisms and independent directors in corporate governance. But the overarching legal framework still imposes constraints. For example, penalties for violations in capital markets remain weak. If someone defrauds a bank or takes 10,000 yuan (about $1,400 USD) from an ATM, they might receive a 5–10 year sentence. For illegal fundraising or financial fraud involving 5 million yuan (about $690,000 USD), the sentence might be 20 years. If the amount exceeds 100 million yuan (about $13.8 million USD), it could result in a death sentence or life imprisonment.
However, in cases of fraudulent IPOs or market misrepresentation, the legal consequences have been far milder. In the past, the maximum penalty was a suspended three-year sentence, and the fine was only 500,000 yuan (about $69,000 USD)—now increased to 3 million yuan (about $410,000 USD). The point here is: the light penalties reflect a deeper issue—society has not taken these violations seriously. This lack of seriousness is embedded in the design of the law. To truly develop China’s capital market, we need much stricter enforcement. But this is difficult—it would require amendments to the Criminal Law, Securities Law, and Company Law. That said, we are gradually making progress.
Third, there is a fundamental misconception about the market itself. Most people believe that the primary purpose of capital markets is financing. But for a market to thrive, it must also serve investors. A functioning capital market relies on a risk premium—returns on risky assets that exceed risk-free alternatives. Yet this understanding is lacking in China. People tend to see the market solely as a vehicle for raising capital. Once funds are raised, the process is considered complete. The focus is not on investor returns, which should be the most important consideration. While it’s true that finance must serve the real economy, capital markets must also serve investors.
Li Daokui:
You’re right—there’s no “hero culture” in China around making money in the secondary market. But I’m optimistic, because things are changing. For example, Zhang Lei from Hillhouse Capital, a distinguished alumnus of Renmin University, donated 300 million yuan (around $41 million USD) to his alma mater. There’s also the Chongyang Institute for Financial Studies, founded by Renmin University. And more recently, DeepSeek earned its first big profits through secondary market trading using AI. That success led them to think: if AI can trade stocks, why not train large language models? And that’s what they did. Many breakthroughs in AI owe their early momentum to profits made in the secondary market by young innovators. We should promote these stories. I believe the younger generation is adapting faster than the older one.
Wu Xiaoqiu:
Exactly—that’s where China’s hope lies.
Li Daokui:
I agree with what you said earlier—market manipulation often goes unpunished. But why is that? Does the Ministry of Public Security have a dedicated financial crimes division focused on market misconduct? Does the China Securities Regulatory Commission (CSRC) have the capacity to work with prosecutors to take violators to court?
In the U.S., the SEC can work with federal prosecutors and courts to take swift action. Violators can be arrested in broad daylight, photographed in handcuffs, and taken straight to jail. Can you imagine CSRC officials doing that in China? Of course not—they don’t have that kind of authority.
Wu Xiaoqiu:
No, the CSRC doesn’t have that authority. It lacks judicial powers—it can’t even freeze accounts. Its top penalty is a 500,000 yuan (about $69,000 USD) fine and a lifetime market ban. But we are gradually recognizing the importance of the capital market. At the Central Financial Work Conference held in late November 2023, capital markets were described as the “hub of modern finance and the economy.” That was a key conceptual breakthrough. Once we shift our mindset, improvements will follow.
Editor: LQQ
