Abstract
How has China been able to offset its institutional weaknesses at home while achieving impressive economic results worldwide without having had to move closer to the existing models of western countries? This article examines international capital market practices and explains why in just a decade, China and its corporate enterprises have transformed from inexperienced conformists, to sophisticated players, and finally to game-changers dominating today’s headlines.
By proposing the idea of “institutional arbitrage,” this article argues that China compensates for its internal institutional deficits by leveraging the complexity of regulatory regimes across various countries, and thereby pursues its development strategy with unprecedented speed. With Rule 144A and Regulation S of the U.S. Securities Act serving as platforms for such an approach, obscure domestic regulations in China further set a firewall between domestic and global markets to minimize risk exposure. Consequently, risks are transferred across borders and flow into less-regulated markets overseas, as evidenced by the recent outbreak of corporate frauds surrounding Chinese firms in major global stock exchanges. The proliferation of activities of Chinese firms overseas will foster more political and regulatory clashes between Chinese and foreign regulators in the foreseeable future.