Chapter 2 The Chinese Equity Market： Historical Development and Characteristics

2.0 Introduction

In many ways the Chinese equity market could be described as an emerging market. For example， it has experienced extraordinary growth since the establishment of the Shanghai Stock Exchange （SHSE） and the Shenzhen Stock Exchange （SZSE） in the early 1990s， with the number of listed companies increasing from 183 in 1993 to 2，063 by the end of 2010. Security accounts held by shareholders have increased from 8.350 million to 188.580 million over the same period. The aggregate market capitalisation relative to Gross Domestic Production （GDP） has also risen from 10.200% in 1993 to 70.540% by the end of 2010. In terms of market capitalisation， the Chinese equity market is now second only to Japan in the Asian-Pacific region. However， it has also been argued that the financial system is unsound and the market is unable to produce risk-commensurate returns for investors （Eun and Huang， 2007）.

For years， both academics and practitioners have tried to understand the Chinese equity market. Their interests generally include： what are the unique characteristics of the market？ Do market price changes conform to the Efficient Market Hypothesis （EMH）？ What are the equity pricing factors？ What are implications of market performance from the perspective of both policy makers and investors？

The purpose of this chapter002. It is of particular importance because it sets the context for a more complete examination later in the book of the key issues for equity return predictability， such as market timing activity and trading strategies. For example， the large movements in the Chinese equity market as shown in Section 2.2.2.1 indicates that market timing may add value to the investment management process， which is corroborated by the empirical evidence in Chapter 6. Further discussion on the importance of this chapter to the overall research will be made in later sections.

The chapter is organised as follows. Section 2.1 reviews the market history， including providing some definitions， features， problems and the driving forces for each stage of the market evolution. Section 2.2 gathers and reviews some general data on the market， including fundamental statistics （on the number of listed companies， the quantity of shares issued and the level of market capitalisation）， market performance （including risk-return patterns， the extent of market downturn risk， and the overall level of market integration）， and the underlying dynamics of the market performance， over the period 1993 to 2010， the specific period related to the subsequent empirical work in this thesis. Section 2.3 concludes.