Part II establishes the alternative law and political economy framework by unpacking the dynamics between politics and law in the process of China’s market reforms. It starts with describing the relationship between law and politics in constructing one of the primary mechanisms of macro control in China – China’s socio-economic development blueprint, the “Five-Year Plan.”

It then moves to a chapter-by-chapter analysis of the evolving roles of law during China’s market reforms, outlining a three-stage shift in the allocation of market governance authorities within the Party-state system through legal evidence.

Throughout this part of the book, the author examines the legal configurations of political-power dynamics through a systematic investigation of the vast body of market-related primary and secondary sources of law and Chinese Communist Party (CCP) documents that have been promulgated in China since the early reforms until the present day. This Part reflects how two functions of law – economic and political – have developed side by side, each supporting the other.

To fully understand the role of law in China’s capital market, one must first consider how modern firms and the capital market came to form and how their early emergence fit within the Party-state’s overall economic development plans.

The chapter presents the emergence of the capital market in China. It focuses on two key elements: (1) the rise of the large (public) firm and (2) the creation of the capital market as a platform for the offering and exchange of securities. Through these elements, the chapter looks at how the legal framework that governed firms in the early stages of market development was shaped by, and helped secure, the political–economy dynamics at that time.

Part III applies the suggested analytical framework at the micro level by delving deep into China’s corporate and capital market development puzzle. It uses the explanatory power of law and political economy to bring more clarity to China’s evolving approach to corporate governance. The purpose is to better understand the role played by formal law in governing Chinese public firms and ultimately in China’s capital market growth and to unpack the political–economic determinants that drove its evolution. The chapters in this part of the book pay particular attention to the creation and efficacy of corporate governance institutions, both traditional and idiosyncratic, that operate in the Chinese market.

This part of the book finds that law and political economy dynamics have produced operational results. They have mobilized market participants (both economic and political) to design and deploy various growth-promoting mechanisms within firms and in the market at large. The analysis shows how such mechanisms at times triggered, supported, boosted, or replaced more conventional corporate governance institutions in ways that eventually marched the market forward.

Chapter 2 explains that the traditional framework through which economic development is analyzed creates a puzzle when applied to the Chinese market. Regarding clearly defined, strong, and predictable rights and reliable legal institutions as preconditions for financial market development does not align with the ways in which China’s financial market evolved. The chapter highlights the resulting marginalizing view of the role of law in China. It ponders the dissonance that was created between the common devaluing of Chinese law and the Party-state’s sophisticated use of law to govern markets. To resolve this dissonance, the chapter offers law & political economy as an alternative analytical framework through which to address China’s market development puzzle and the role of law within it.

The chapter also provides notes on methodology, including data collection and methods of analysis, as well as important caveats about the study.

Chapter 3 starts the chronological review by looking at the role of law during the Early Reform Era (1978–1989). In this era, the Party-state vested economic decision-making authorities with its local governments, giving them a relatively free rein to experiment with and administer economic activity by limiting central law-making. The chapter tracks how such political–economic relations were bolstered by the Party-state’s choices with respect to the use of law. It also shows how, as the era progressed, the law was used to carve out and legitimize politically palatable forms of market activity.

Chapter 4 examines legal configurations of political power dynamics during the Legal Modernization Era (ca. 1992–2010) – a golden age for legal reformers in China. The chapter reviews the development of significant national-level economic laws and regulations that gradually replaced many of the fragmented and probationary rules used earlier. The analysis of legal and policy documents suggests that the use of law in this period was consciously directed in two main directions: the use of law to structure and support the creation of markets (i.e., the economic function) and the use of law to reconfigure governance capacities and boost more centralized market regularity within the Party-state system (i.e., the political function). These two functions of law also set the foundation for what is known today as China’s state capitalism and its dominance in the domestic and international markets.

This book examines the role of law through four decades of market reforms in China. It employs two layers of analysis: a market development macro layer and a corporate governance and capital market micro layer. The macro layer, Part II, establishes the analytical framework. It shows how the law translates and secures political–economic power dynamics within the Party-state system. Examining the evolving functions of law through the eras of market reform, the analysis shows how the law supports the Party-state’s efforts to strike a delicate balance between its needs and desires for macro control, the interests of hierarchies within the Party-state system, and the market, thereby configuring China’s unique socialist market economy. The micro layer, Part III, implements the framework. It digs deep into corporate governance and the Chinese capital market and considers how law and political economic determinants entwine in shaping the business environment in which public firms operate.

Drawing on a chronological study of an extensive archive of governance documents issued by organs of the Chinese Party-state since economic reforms began in 1978 until the present, the book sheds a new light on a long-standing debate about the role of law in China’s economic development and about the possible varieties of growth-supporting governance institutions.

Scholars have long regarded certain attributes of corporate governance, particularly legal institutions that protect investors, as engines for financial development, capital market expansion, and growth. Yet, the development of China’s market challenges many of the underlying assumptions in those theories and leaves its observers puzzled. Consequently, many have dismissed the role of law in China’s economic development. But they have neglected to consider the political functions of law and how they have bolstered the development of the Chinese market. Part I delineates the conceptual and analytical frameworks underpinning the book. Chapter 1 unpacks the traditional framework that shapes how scholars and policymakers think of corporate governance and its role in financial development and market growth. Chapter 2 offers law and political economy as an alternative analytical framework through which to address the puzzle and the role of law within it.

The chapter, termed Legalized Politicization Era (2010–present), examines the role of law in securing a new political–economic equilibrium. In this era, the consequences of state capitalism, China’s economic turning point, and a legitimacy crisis in the Party-state’s rule, advanced the use of law in two directions: intensifying the presence of the regulatory state in the market on the one hand while shifting market governance powers directly to the CCP itself on the other. The chapter describes how in these developments the law has been assigned a meaningful and more explicit role in steering capital flows and structuring markets. It argues that taking notice of the two functions of law has become ever more relevant.

The chapter examines the corporate governance institutions that developed during the Legal Modernization Era. It analyzes the traditional corporate governance mechanisms, both internal and external to the firm, that were embraced in China and adapted to domestic political–economic circumstances. The chapter discusses how China’s superficially convergent, investor-oriented corporate governance framework actually diverged in practice. It illuminates the political functions of law, showing how the corporate governance framework was ultimately directed to support the reconsolidation of political–economic powers and the shift toward state capitalism. The chapter offers comparative insights drawn from alternative systems of corporate governance and analyzes the implications of the Chinese framework for investors in the Chinese market.