China's Stock Market Instability Analysis And Countermeasures

Established a decade ago, the stock market now becomes an indispensable part of Chinese financial markets and plays an important role in economic reform and growth. But the price and trade volumes often fluctuate violently, which reflect some flaws in the mechanism of the market.Fluctuation in some extent is reasonable. But violent fluctuation and excessive speculation will weaken the market efficiency and do harm to the development of the market. The efficiency of stock market refers to the ability that the market can allocate financial resources to the enterprise, which can make use of the funds most efficiently. The Efficiency Market Hypothesis (EMH) has three forms, weak efficient market, semi-strong weak efficient market and strong efficient market. In a strong efficient market, the prices not only reflect all public information, but also non-public information .So no investor can exploit extra profits even with inside information. In Chinese stock market, insider trade and frauds are common things. Asymmetric information and excessive speculation worsen the market instability.In fact the instability of Chinese stock market is a problem about efficiency. Market system, structure and participants are three factors affecting the efficiency of stock market and among them market system is fundamental to market efficiency. So this paper will focus on the market system to analyze the roots of instability of Chinese stock market.The paper contains three chapters. In chapter 1,the instability of Chinese stock market, the author measures the degree of instability of Chinese stock market with a set of indictors and draw a conclusion that Chinese stock market is very unstable. Next the author point out some harm caused by the instability of stock market.In chapter 2,the causes of the instability, the author analyzes flaws of market system, including listing and issuing regulations, segmentation of equities, intermediaries, law and rules, firms, investors. The listing and issuing regulation of Chinese stock market lead to disequilibrium between primary and secondary markets. The segmentation of equities makes a big potion of shares are unmarketable, and hampers merger and acquisition in the market. The intermediaries are not honest to investors and they often connive with listing firms to deceive investors. The government intervene the market too much and too often while relevant laws and rule are not well designed. Principal-agent problem is unresolved and more and more firms earn little profit. The portion of individual investors to institutional investor is too high compare with other stock markets so the herd effects might happen with higher probability.In chapter 3,how to overcome the instability, the author put forward some resolution to instability of Chinese stock market. The listing quota should be canceled and replaced by registry rule. The price of new issues should be determined by market and the present pricing method should be improved. The state-owned equities should enter market and the listing firms should become actual stock companies. The laws and rules and supervision system should be improved. There should be more institutional investors in stock market.