Scholars have long regarded certain attributes of corporate governance, particularly legal protections of private ownership, as prerequisites for financial development, deep capital markets and economic growth. Yet, the development of the Chinese market challenges many of the underlying assumptions of this “law matters” thesis. For decades, China achieved substantial growth and developed markets while preserving market control, state ownership, and relatively weak legal institutions. Informal means and functional substitutes provided investors with credible assurances that filled in some of the voids of law by incentivizing growth and governing markets.

The enduring efficacy of these functional substitutes has left its observers puzzled and resulted in a broad intellectual and popular disregard for the role of law in China’s economic rise. Laws and legal institutions are often portrayed as window dressing or as a marginal governing tool at best. Corporate governance institutions are similarly dismissed as a political mirage. The tightening of market controls in China in recent years and the rising presence of political institutions in firms (discussed, here), in conjunction with China’s economic slowdown, further reinforce the widespread skepticism about the importance of law in China’s socialist market economy.

In my newly released book,  “Law and Political Economy in China: the Role of Law in Corporate Governance and Market Growth” (Cambridge University Press, 2023), I call to reevaluate this approach. The role of law in the Chinese market, I argue, has been wrongly undervalued.

READ MORE »