CAPITAL FREEDOM IN CHINA network present the Chinese economy with a potentially great financing capacity The gap between stock market potential and reality is, however, still quite wide. While Chinas physical infrastructure for capital mar kets is impressive by many measures, the institutional infrastructure necessary for investors to be willing to part with their money is largely issing or not functioning in its intended way. As a result, recent efforts by the government to push up stock prices have led to contin- uous disappointment. Investors are not rushing back to buy stocks and the stock market is not showing enthusiasm Chinas stock market development started during the 1860s, was terrupted several times by wars and ideology, and reemerged in the late 1980s. In this article, I compare the stock market under the cur- rent regime with its past under the Qing dynasty and during the Republican years before 1949. Discussion centers around several key questions: (1)In the absence of necessary impersonal legal and regu- latory institutions, what arrangements did China come up with to induce public investors to join stock trading?(2) What was done to overcome the confidence and trust barriers? (3)With the government being the largest shareholder in most publicly listed companies today, how does that impede legal development and limit capital freedom? Answering these questions will help us understand the cultural roots of the Chinese government's large role in the economy, in addition to the Marxist political economy roots. What we will see is a constant struggle between the traditional Chinese preferences for informal or relationship-based rules of business transactions and the stock mar- kets dependence on formal structures of contracting and gover That struggle in the capital market mirrors closely the struggle by the arger Chinese society with the process of modernization The Origin of China's Stock market: 1860s to 1911 China is known to have invented paper money during the Song dynasty, 960-1279(see von Glahn 2005). However, China did not venture into innovations in securities trading until the late 19th cen- tury. The move to adopt joint-stock companies with limited liability and initiate a stock market was largely a consequence of the"Self- Strengthening Movement" following the defeat to Britain and revealed that China was far behind in military technology and taly France in the Opium Wars(1839-42 and 1858-60). The wa 589589 Capital Freedom in China network present the Chinese economy with a potentially great financing capacity. The gap between stock market potential and reality is, however, still quite wide. While China’s physical infrastructure for capital mar￾kets is impressive by many measures, the institutional infrastructure necessary for investors to be willing to part with their money is largely missing or not functioning in its intended way. As a result, recent efforts by the government to push up stock prices have led to contin￾uous disappointment. Investors are not rushing back to buy stocks, and the stock market is not showing enthusiasm. China’s stock market development started during the 1860s, was interrupted several times by wars and ideology, and reemerged in the late 1980s. In this article, I compare the stock market under the cur￾rent regime with its past under the Qing dynasty and during the Republican years before 1949. Discussion centers around several key questions: (1) In the absence of necessary impersonal legal and regu￾latory institutions, what arrangements did China come up with to induce public investors to join stock trading? (2) What was done to overcome the confidence and trust barriers? (3) With the government being the largest shareholder in most publicly listed companies today, how does that impede legal development and limit capital freedom? Answering these questions will help us understand the cultural roots of the Chinese government’s large role in the economy, in addition to the Marxist political economy roots. What we will see is a constant struggle between the traditional Chinese preferences for informal or relationship-based rules of business transactions and the stock mar￾ket’s dependence on formal structures of contracting and governance. That struggle in the capital market mirrors closely the struggle by the larger Chinese society with the process of modernization. The Origin of China’s Stock Market: 1860s to 1911 China is known to have invented paper money during the Song dynasty, 960–1279 (see von Glahn 2005). However, China did not venture into innovations in securities trading until the late 19th cen￾tury. The move to adopt joint-stock companies with limited liability and initiate a stock market was largely a consequence of the “Self￾Strengthening Movement” following the defeat to Britain and France in the Opium Wars (1839–42 and 1858–60). The wars revealed that China was far behind in military technology and that in 44795_Ch19_Chen:19016_Cato 8/29/13 11:37 AM Page 589