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.

This chapter shows that state-owned enterprises (SOEs) still play a major role within the Chinese corporate ecosystem, but even after a long period of reforms, they are still plagued by skewed government incentives leading to irrational investment decisions, huge waste of resources, and widespread defiance of central government regulations. The chapter includes case studies of the coal and power sectors to demonstrate the unholy "tripartite" relationship among SOEs, local government officials, and corrupt central regulators, all engaging in rent-seeking activities in their own vested interests. Current reform programs fail to address these key defects.

Chapter 5 “Disillusionment and Mobility (1983–2001)” argues that rational-legal administration did not exhaust the list of mezzo or organizational outcomes that resulted from RJ’s institutionalization. RJ’s rational-legal administration encountered six limitations that exposed and exacerbated the organization’s preexisting deficiencies, the IRI’s structural shortcomings, the shah’s neo-patrimonial legacies, and bureaucracy’s inherent flaws. These limitations included heightened centralization, intensified careerism, parliamentary entanglements, emerging corporatization, persistent redundancies, and dual executives. On a micro or individual level, these limitations and the inefficiency and stagnancy that they created caused some former RJ members to experience fatigue, apathy, and disillusionment. At the same time, RJ’s bureaucratization enabled other former members, particularly those who had lobbied for the organization to become a ministry, to experience political and social mobility as government officials, civil servants, and corporate executives – the very individuals whom former RJ members had initially despised as revolutionary activists in light of their anti-bureaucratic and anti-materialistic worldview.