Finance under state capitalism: Re-conceptualising capital markets through China’s financial transformation

by Johannes Petry*

When one thinks of China, burgeoning capital markets – the epitomisation of free market capitalism – are certainly not the first thing that spring to mind. By 1989, capital markets did not even exist in China. But fast forward three decades, and China’s financial system has grown into a US$45 trillion industry that boasts the world’s the 2nd largest equity markets, 2nd largest bond markets and 3nd largest futures markets in the world, contributing 9% to China’s GDP. More companies have listed in Hong Kong, Shanghai and Shenzhen than anywhere else, and while China’s markets had been virtually closed from the outside world for decades, they have become connected to both regional and global financial marketsat an unprecedented pace’. Capital markets have become a crucial part of China’s political economy, contributing to the increasing financialization of China’s socio-economic system since the global financial crisis 2007-2009.
A common outcome of such financialization processes is often a loss of power on behalf of the state – even though it might have initiated financial reforms and innovation – as it
increasingly needs to accommodate the growing power of private financial actors and follow financialised logics. China’s financialisation process, however, follows a distinctively different path. As I argue in an article that was recently published in Economy & Society, states can potentially exercise a considerable degree of control over financialization, thereby shaping its very form. What we can hence observe is afinancialization with Chinese characteristicswhere the state actively shapes financialization and its social outcomes. Although finance in China is expanding and permeating evermore aspects of economic and political life, this occurs within the context of China’s socio-economic system of authoritarian state capitalism in which the Chinese Communist Party aims to maintain its control over socio-economic development, in part by managing policy uncertainties through the financial sector. Thereby, the authorities try to actively manage financialization to achieve developmental goals. China’s president Xi Jinping, for instance, repeatedly made clear that the tasks of China’s financial sector were:[to] better serve the real economy, containing financial risks and deepening financial reforms’. Importantly, this is not done through brute force or command-and-control mechanisms, but through ‘pivotal points’ in market infrastructures that enable the management and steering of financialization processes.
To this end, the article analyses the crucial role of China’s state-owned securities exchanges in the development and management of Chinese capital markets. More than just marketplaces, as providers of market infrastructures
exchanges are themselves powerful actors that exercise considerable influence over capital markets. From market data and indices, listing/creation and trading of various securities, commodities and derivatives, to post-trading activities such as central clearing – exchanges decide the ‘rules of the game’ and act as gatekeepers, deciding who gets in, what is traded and how trading is conducted. Thereby, they are crucial to shaping capital markets. Through analysing the policies and practices of exchanges in managing capital markets, we can gain insights in how Chinese authorities aim to steer China’s financialization process. Capital markets can, thereby, be understood as a site where the authorities exercisestatecraft [through] financial controlwhich enables them to govern the socio-economic system. Control in this context should be understood both as exerting control within financialization by monitoring, regulating and intervening into capital markets, as well as exerting control through financialization by directing market outcomes towards the accomplishment of national development policies. As the paper explores, these target different dimensions of China’s authoritarian state capitalism – from financial risk, over social stability concerns, to the reform of Chinese companies.
This investigation reveals that while market-based finance emerged as an important economic governance tool in China, these capital markets function fundamentally different than ‘global’ capital markets. In a second article, recently published in Competition & Change, I therefore propose to re-evaluate common political economy conceptions of capital markets: instead of viewing these as uniform entities, in opposition to the state and interlinked with a neoliberal policy paradigm, to look at an institutionally embedded ‘varieties of capital markets’. In contrast to the premise that markets are uniform, following the likes of Keynes and Polanyi, economic sociology has shown that markets areembedded in distinct sets of social and political institutionsand thatmarkets do not emerge out of a vacuum’. While functionally all capital markets are characterised by market-based mechanisms of coordination between buyers, sellers and investors, applying the concept of institutional logics to capital markets reveals how the institutional embeddedness of markets and market organisers leads to different market dynamics and outcomes. Consequently, how exchanges (i.e. market organisers) are governed and which constraints and incentives they face matters for the types of markets they organise.
In the West, exchanges are publicly traded companies that have to make profitable business decisions to increase shareholder value; they are situated within an institutional setting informed by a neoliberal logic. The ostensible purpose of these capital markets is to create ‘efficient’ outcomes by enabling the generation of (private) profit, which is achieved by the principles of ‘free markets’ and ‘free flows of capital’ that should be responsible for allocating economic resources without state intervention. While the state is not absent, its priority is enabling private profit creation instead of other socio-economic outcomes,
cementing the power of private finance capital. Capital markets organised by these (mainly US-based) global exchanges should therefore be conceptualised as neoliberal capital markets. These markets dominate and perpetuate the contemporary neoliberal global financial order.
Instead of primarily following neoliberal principles, China’s state-owned exchanges meanwhile facilitate the development of what can be called state-capitalist capital markets
capital markets that follow an institutional logic derived from China’s state-capitalist economic system. The institutional logic of China’s state capitalism is not simply one of command-and-control but a combination of top-down state coordination and bottom-up market competition. Of course, millions of profit-driven speculating investors exist in China that create manias, panics and crashes like in any capital market. But whereas profit creation for private finance capital is the primary underlying principle in neoliberal markets, importantly, the Chinese state intervenes into capital markets to steer them into ‘productive’ tracks and facilitate state objectives. The defining difference between neoliberal and state-capitalist logic is not the existence of markets per se but rather the principles that underlie market organisation (profit creation vs state objectives) and the actors that dominate/shape these markets (private finance capital vs state institutions). Consequently, what can be observed in China is the emergence of a fundamentally different way of thinking about, managing and governing capital markets which are permeated by but also reproduce the institutional logic of Chinese state capitalism. By analysing the domestic development of Chinese capital markets, their integration into global markets and their internationalisation, the paper showcases how these markets consequently represent an alternative to, resist pressures to conform with and even actively challenge the neoliberal capital markets that underpin the contemporary global financial order.
This case study hence highlights the need to re-evaluate the conceptual toolbox with which we analyse finance. While capital markets can follow and facilitate neoliberal logic, this is not necessarily the case. Rather, capital markets are embedded within specific institutional settings whose institutional logic shapes how they function. This conceptual point is important when extending such an analysis of capital markets beyond China. Are there other ‘varieties of capital markets’ that are shaped by different institutional logics and differ from a uniform conception of ‘global’, ‘Anglo-American’ or ‘neoliberal’ capital markets in countries where the state maintains a qualitatively different role within the economy? In a new StateCapFinance research project, we seek to address this question by comparatively analysing the relationship between states and capital markets in six increasingly financialised state-capitalist economies (BRICSS) to create a better understand the interplay of models of capitalism, their trajectories of financialisation and how they interact with, integrate into and ultimately shape the global finance and the world economy.
* Johannes Petry is a Postdoctoral Fellow at the SCRIPTS Cluster of Excellence at Free University of Berlin and CSGR Research Fellow at the University of Warwick.
All emphases added by the editor.

Zhengzhou Commodity Exchange (by Johannes Petry)

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