Rethinking China’s capital market and financial stability after the global financial crisis: the significance of institutional investors

Could institutional investors contribute to the stability of capital markets? The recent 2007–2008 American subprime mortgage crisis and the 2009 European sovereign debt crisis provided a good answer. Although the impact of the two financial crises is still felt across their respective geographies, European debt crisis countries, especially Greece, continue to lag behind; at the same time the US stock market recovered rather quickly from the subprime mortgage crisis. What explains the different performances in these countries? There are a large number of academic explanations; this chapter explores the factors that help to explain the difference in the recovery paths by using data from some OECD countries, and aims to explain what role institutional investors (or the lack thereof) play in the respective recovery paths of the US and European debt crisis countries. From the OECD countries data we can see that institutional investors played an important role in constructing a mature capital market, maintaining capital market stability and preventing a potential financial crisis. China has published several state normative documents to promote the development of institutional investors. It is expected that this will lead to a smoothing of the volatility of China’s capital markets.