CATO JOURNAL Chinas gradualist reform approach in which pragmatic economic reforms have been allowed and adopted without correcting the philo sophical foundation of the country's political, economic, and legal system SOEs, government, and Marxist ideology still dominate the economy,politics, and business--although market forces and private ownership are a significant part of the Chinese society and still on the rise. In particular, political power is not formally checked or balanced and neither is the monopoly position of SOEs, which has allowed government agencies and SOEs to reenergize and expand their power to cut into capital freedom as they desire. There has not been a formal debate or reform to define and limit the scope of govern ment. Taxation has been increasing at more than twice the speed of GDP growth. Thus, unless and until political reforms take place and functioning check-and-balance institutions are put in place formally SOEs and government power present immediate threats to the pre- cious but still limited degree of capital freedom and individual liberty in China In this article, I use China's capital markets, more specifically its stock market, to illustrate why the lack of a formal rejection of Marxist economics, as well as the lack of political reforms, has inter- nalized forces and contradictions in the Chinese society that have the potential to reverse the many positive achievements of the last 35 years. At a minimum, such forces will continue to make it difficult for the rule of law and for justice and equity to progress further oday China has a sizable capital market, with more than 2, 400 listed companies on the two stock exchanges with a total market cap- italization of more than RMB 21 trillion(almost 50 percent of Chinas gDP). More than 300 securities and trust companies are licensed to provide investment banking and stock brokerage services through more than 2, 500 branch offices in cities large and small This extensive network of brokers has attracted more than 200 mil lion stock and mutual fund accounts. China today has among the most robust securities market infrastructures in the world, when measured in terms of both trading capacity afforded by the electronic systems and potential investor reach facilitated by the vast physical distribution channels. The physical infrastructure and distributi IThe statistics cited are all as of mid- vear 2012 and come from the Chinese SecuritiesRegulatoryCommission(www.csre.gov.cn) 58S588 Cato Journal China’s gradualist reform approach in which pragmatic economic reforms have been allowed and adopted without correcting the philo￾sophical foundation of the country’s political, economic, and legal system. SOEs, government, and Marxist ideology still dominate the economy, politics, and business—although market forces and private ownership are a significant part of the Chinese society and still on the rise. In particular, political power is not formally checked or balanced and neither is the monopoly position of SOEs, which has allowed government agencies and SOEs to reenergize and expand their power to cut into capital freedom as they desire. There has not been a formal debate or reform to define and limit the scope of govern￾ment. Taxation has been increasing at more than twice the speed of GDP growth. Thus, unless and until political reforms take place and functioning check-and-balance institutions are put in place formally, SOEs and government power present immediate threats to the pre￾cious but still limited degree of capital freedom and individual liberty in China. In this article, I use China’s capital markets, more specifically its stock market, to illustrate why the lack of a formal rejection of Marxist economics, as well as the lack of political reforms, has inter￾nalized forces and contradictions in the Chinese society that have the potential to reverse the many positive achievements of the last 35 years. At a minimum, such forces will continue to make it difficult for the rule of law and for justice and equity to progress further. Today China has a sizable capital market, with more than 2,400 listed companies on the two stock exchanges with a total market cap￾italization of more than RMB 21 trillion (almost 50 percent of China’s GDP).1 More than 300 securities and trust companies are licensed to provide investment banking and stock brokerage services through more than 2,500 branch offices in cities large and small. This extensive network of brokers has attracted more than 200 mil￾lion stock and mutual fund accounts. China today has among the most robust securities market infrastructures in the world, when measured in terms of both trading capacity afforded by the electronic systems and potential investor reach facilitated by the vast physical distribution channels. The physical infrastructure and distribution 1 The statistics cited are all as of mid-year 2012 and come from the Chinese Securities Regulatory Commission (www.csrc.gov.cn). 44795_Ch19_Chen:19016_Cato 8/29/13 11:37 AM Page 588