NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Government as a Discriminating Monopolist in the Financial Market: The Case of China

Roger H. Gordon, Wei Li

NBER Working Paper No. 7110
Issued in May 1999
NBER Program(s):   PE

To date, China has maintained a variety of restrictions on its financial markets. In addition to imposing capital controls and regulating interest rates, the government controls both the set of firms that can sell equity on the domestic or foreign stock markets, and the amount they can sell. China is unique in that foreigners pay much less than domestic investors for intrinsically identical shares. In this paper, we show that these characteristics of the Chinese financial market are consistent with a government choosing regulations to maximize a standard type of social welfare function. The observed policy of charging much higher prices for equity sold to domestic than to foreign investors can simply reflect the more inelastic demand for equity by domestic investors. Under certain conditions, these regulations are equivalent to income taxes on business and interest income. The pattern of tax rates is not qualitatively different from those commonly observed elsewhere, particularly in other countries with capital controls. Given the ease with which firms and individuals can evade income taxes, however, indirect taxation through restrictions on the financial market may serve as an effective alternative.

download in pdf format
   (338 K)

email paper

This paper is available as PDF (338 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w7110

Published: Gordon, Roger H. and Wei Li. "Government As A Discriminating Monopolist In The Financial Market: The Case Of China," Journal of Public Economics, 2003, v87(2,Feb), 283-312.

Users who downloaded this paper also downloaded these:
Allen, Qian, Zhang, and Zhao w17828 China’s Financial System: Opportunities and Challenges
Boyreau-Debray and Wei w11214 Pitfalls of a State-Dominated Financial System: The Case of China
Gordon and Li w16694 Provincial and Local Governments in China: Fiscal Institutions and Government Behavior
Hsun and Hui-Tzu w9574 Initial Public Offering and Corporate Governance in China's Transitional Economy
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us