CAPITAL FREEDOM IN CHINA the outside shareholders and the corporation is a financial contract (instead of tangible physical goods), there need to be informational institutions, such as a free press and other mass media, to facilitate he uninhibited and fast flow of information. Substantial and truthful information about the stock-issuing corporation is essential for the ccurate pricing of its shares and for the keeping of investors'trust Business organizations and economic transactions in China had relied on personal relationships for centuries. Relationships served as a signaling and commitment framework, or as informal bedrocks for trust and a basis for enforcement of contracts(implicit or explicit) Partnerships of unlimited liability were the typical form of joint own- ership, with partners from a single family, a lineage, a small number of lineages, or the same locality, usually not going beyond townsht boundaries. before the railroad network was built in the late 19t century and afterwards, the lack of mass transportation means pre- ented for centuries the inland local economies from expanding across regions, generating no pressure for business organizational changes. Capital was free but constrained to one's locality or circles of friends and kinship networks. The waterways in southeast China and along the coast could have pressured the unlimited-liability part nership structure and called for more impersonal forms of business organization. However, the emperors'orders forbidding overseas trading since the 13th century and the general anti-commercial Chinese culture stifled the possibility of inter-regional market expat sion afforded by the waterways, which served to limit the develop ment of formal institutions that are necessary for capital to b impers According to Jensen and Meckling(1976) and Easterbrook and Fischel (1989), the modem corporation is simply a"nexus of con- tracts"or a legal creation. For this"nexus of contracts"to work, there have to be supportive laws and impartial enforcement institutions with enough force. But, as of the late 19th century, China did not have the necessary legal or informational institutions for arms-length or impersonal financial contracting, let alone an institutional infra structure for public trading in financial contracts. In Chinas tradi- tion, the legal system is never separated from, or independent of, the administrative system. In addition, Chinas tradition put its emphasis on administrative and criminal sanctions. with a lack of formal devel- opment in contract, civil liability and procedural laws. Rules and ractices did not develop to enforce impersonal contracts o591 Capital Freedom in China the outside shareholders and the corporation is a financial contract (instead of tangible physical goods), there need to be informational institutions, such as a free press and other mass media, to facilitate the uninhibited and fast flow of information. Substantial and truthful information about the stock-issuing corporation is essential for the accurate pricing of its shares and for the keeping of investors’ trust. Business organizations and economic transactions in China had relied on personal relationships for centuries. Relationships served as a signaling and commitment framework, or as informal bedrocks for trust and a basis for enforcement of contracts (implicit or explicit). Partnerships of unlimited liability were the typical form of joint own￾ership, with partners from a single family, a lineage, a small number of lineages, or the same locality, usually not going beyond township boundaries. Before the railroad network was built in the late 19th century and afterwards, the lack of mass transportation means pre￾vented for centuries the inland local economies from expanding across regions, generating no pressure for business organizational changes. Capital was free but constrained to one’s locality or circles of friends and kinship networks. The waterways in southeast China and along the coast could have pressured the unlimited-liability part￾nership structure and called for more impersonal forms of business organization. However, the emperors’ orders forbidding overseas trading since the 13th century and the general anti-commercial Chinese culture stifled the possibility of inter-regional market expan￾sion afforded by the waterways, which served to limit the develop￾ment of formal institutions that are necessary for capital to be impersonal. According to Jensen and Meckling (1976) and Easterbrook and Fischel (1989), the modern corporation is simply a “nexus of con￾tracts” or a legal creation. For this “nexus of contracts” to work, there have to be supportive laws and impartial enforcement institutions with enough force. But, as of the late 19th century, China did not have the necessary legal or informational institutions for arm’s-length or impersonal financial contracting, let alone an institutional infra￾structure for public trading in financial contracts. In China’s tradi￾tion, the legal system is never separated from, or independent of, the administrative system. In addition, China’s tradition put its emphasis on administrative and criminal sanctions, with a lack of formal devel￾opment in contract, civil liability and procedural laws. Rules and practices did not develop to enforce impersonal contracts or 44795_Ch19_Chen:19016_Cato 8/29/13 11:37 AM Page 591