Relationship between legal institutions and equity market- A Comparative Study between China and EU
Abstract
Along with the development of modern economy, the equity market is playing an important role in the nation’s economy. Different legal institutions as a tool for the government, is in the charge

List of Tables
Table 1 Stock market capitalization - end of period - Milliards of euro – NSA 2008 25
Table 2 The GDP (PPP) and the GDP (PPP) per capita for the European Union and for each of its 27 member states, sorted by GDP (PPP) per capita in 2008 36
Table 3 27 EU member’s unemployment rate from 2005 to 2008 compared with the United States and Japan 41
Table 4 rate of China annual inflation from 2000 to 2006 45
Table 5 Interest rates paid on required reserves, % 46

List of Figures
Figure 1 GDP comparison with Japanese, US and EU from 2001 to 2009 in predict 37
Figure 2 Interest Rates in Eurozone, US and Japan from 2000 to 2007 38
Figure 3 Japanese GDP growth vs exchange rate Euro/Yen from 2001 to 2007 38
Figure 4 US GDP growth vs exchange rate Euro/Yen from 2001 to 2007 39
Figure 5 Euro area and EU 27 unemployment rate from 2000 to 2007 40#p#分頁標題#e#
Figure 6 Unemployment rate by country in the EU-27 in March, 2008 41
Figure 7 2003-2007’s GDP and the Growth Rate of China 44

Chapter 1 Introduction
1.1 Background
The Law and Finance approach to corporate governance has recently brought back under the economic spotlight the role that legal and judicial institutions play in the workings of financial markets. In the standard textbook model, complete and costless enforceable contracts resolve any problems arising from the conflict of interests between a corporation’s inside management and its outside shareholders. In the real world, however, separation between ownership and control generates agency costs. Proponents of the Law and Finance approach have argued that, if properly designed in such a way as to safeguard investors’ property rights, both the letter of the Law and its enforcement by the courts can reduce these agency costs, thus encouraging the development of financial markets by reducing agency costs. While these ideas are not new, the approach is new beginning with the seminal work of La Porta, Lopez de Silanes, Shleifer, and Vishny, a whole line of research has developed, which attempts to support them with extensive empirical analysis. Indeed, important insights have been gained from cross-country comparative studies of corporate governance standards and their impact on the structure of financial systems. Two examples may suffice. First, La Porta, Lopez de Silanes, Shleifer and Vishny have shown that countries in the Anglo-Saxon legal family protect minority shareholders to a significantly greater extent than do countries in the French legal tradition. This may help explain why firms in the Anglo-Saxon legal tradition use more external equity than do firms in the French legal family. Similarly, the German legal tradition protects debt holders more than it protects shareholders (and more than other legal families around the world do ).This may explain why debt features so prominently as a source of finance for firms in countries whose commercial odes follow the German one. Second, significant progress has been made towards the resolution of the issue of the “causality link” in the relationship between financial development ad economic growth by taking legal and judicial institutions explicitly into account. Rajan and Zingales, for example, instrument financial development with legal origin variables and show that the extent of financial development that is due to legal institutions (and is, therefore, arguably exogenous to future economic development) is positively and significantly associated with subsequent economic growth.
Recent research in corporate finance has highlighted the importance of legal institutions and judicial enforcement for the performance of capital markets. Equity markets are generally thought to be the most sensitive to the legal provisions in favor of financiers and to the effectiveness of judicial enforcement of these provisions. By definition, shareholders are residual claimants to the income stream generated by companies: their income rights are less tightly specified than those of debt holders. Therefore, they are more exposed to the danger of opportunistic behavior by managers, be it diversion of corporate resources or non-value-maximizing decisions (such as nepotistic appointments, pursuit of unprofitable “pet” projects, low managerial effort, etc.). The main limit to such opportunistic is the set of legal rules protecting shareholders (often referred to s corporate governance legal standards), the effectiveness of courts in enforcing such rules and the ability of shareholders to verify if their rights have been violated. The latter in turn depends on the transparency of corporate accounts and on the quality and timeliness of the information that companies disseminate. It is generally believed that improving corporate governance rules, their enforcement and the quality of accounting standards should result in greater reliance on equity financing by companies. This could occur either because such institutional changes directly limit the amount of corporate resources diverted by managers or because they allow shareholders to monitor managers more cheaply and effectively. The hypothesis that stronger protection of shareholder rights leads to a broader market for external equity is central to the recent work by La Porta, Lopez de Silanes, Shleifer, and Viashny.#p#分頁標題#e#
The presumption that better corporate governance rules and stricter judicial enforcement should lead to larger mount of equity funding appears reasonable, being borne out by a host of microeconomic models of agency costs in corporate finance, starting with the seminal paper by Jensen and Meckling. However, the literature has been silent on the effect that such improvements in the institutional framework should have on the equilibrium rate of return on equity and on the cost of capital faced by companies. This is not surprising, considering that microeconomic models of corporate financing take the opportunity cost of funds as exogenously given. For instance, Jensen and Meckling (1976) portray financiers as competing risk-neutral individuals who require companies to pay an expected rate of return equal (net of agency costs) to the interest rate, and the latter is assumed to be fixed. Perhaps this has induced many to presume that rate of return on equity is unaffected by changes in the legal environment. However, this need not be true if one shifts focus from a single company to the equity market as a whole. We show that the effect of the legal environment on the return on equity depends on the specific mechanism through which this change impacts the equity market. For instance, consider two different experiments. The first is a reduction of the private benefits that managers can extract from the company, for instance by introducing legal limits to transactions with other companies that may dilute the income rights of minority shareholders (mergers, asset sales). The second experiment is a reduction of the legal and auditing costs that shareholders must bear to prevent managerial opportunism. Such cost reduction may for example result from the introduction of class action suits or voting by mail. These two types of institutional change can have opposite effects on the observed equilibrium rate of return on equity, controlling for undiversified risk, even though they both reduce agency costs and boost the size of the equity market. We also show that the size of these effects on the equilibrium rate of return is increasing in the degree of international segmentation of equity markets. In fact,

Chapter 3 Methodology
3.1 Case selection
How to determine the size of a country’s capital markets are its legal rules and the effectiveness of enforcement .This dissertation investigates whether the law and finance approach to corporate governance can also help improve our understanding of international stock returns, a goal that has so far proved elusive for the Capital Asset Pricing Model (CAPM).

In our specification search, we started by allowing beta, the real exchange risk sensitivity and the idiosyncratic risk to impact differently the expected excess return in the developed and emerging markets. We found that one cannot reject the hypotheses that the idiosyncratic risk matters only for emerging markets, that the impact of beta is the same across the two sub-samples and that, controlling for these risk factors, the real exchange risk factor does not have explanatory power.

We report our results for the earnings-price ratios. Data limitations constrain us to the set of developed markets. We report our baseline specification. This includes the domestic government bond yield, the expected growth in earnings per share and the beta with world market portfolio, as well as the one-share/one-vote dummy and the origin dummies. To interpret our results, the reader should keep in mind that our dependent variable averages 0.069 in the sample, has a standard deviation of 0.0216 and a range between .0.014 and 0.135. The domestic bond yield, the expected growth rate and beta all enter with coefficients whose signs are in line with our a-priori expectations (although the estimated market price for risk is again not statistically significant).

Whether international differences in this variable can be explained by cross-country differences in the institutional variables analyzed throughout the paper. The evidence is to be taken with a grain of salt due to the paucity of the sample and the heterogeneity of the measures of IPO (initial public offering) under pricing. Theory suggests that differences in accounting standards should be a key explanatory variable of the international variation in IPO under pricing. The presence of IPO under pricing is generally viewed as the product of informational asymmetries between the generality of investors and “smart money” in the market for new issues.
3.2 Research design and data collection
This study will deploy both the quantitative method and qualitative method in the process of analysis. A theoretical framework is first introduced that departs from the perfect-markets assumption of the classical CAPM to analyze the effects of the efficiency of the judicial system or the legal protection of investors’ property rights on the equilibrium of the equity market. These institutions influence the supply of equity (to the extent that they affect the costs that shareholders must bear to monitor and audit management and enforce their claims through the courts). They also affect firms’ demand for equity financing, as more efficient institutions boost the marginal productivity of physical capital.#p#分頁標題#e#

We then investigate whether the observed risk-adjusted return differentials across countries-usually taken as prima facie evidence for equity markets’ segmentation can be explained with different enforcement costs for minority shareholders resulting from different legal and judicial institutions. We document that, across countries, there is a positive (as opposed to negative) correlation between judicial efficiency (or rule of law) and risk-adjusted expected rates of return. This represents strong evidence that the causes for segmentation among national equity markets are not confined to differences in the degree of protection of shareholders’ rights.

Finally, we use a panel of industry-level data to identify econometrically the effect segmentation and other residual country-specific (and industry-specific) fixed effects. We document that investors demand a significantly lower expected return following improvements in the quality of the institutional environment.

In the essays, I use economic theory to set models to capture an improvement of the legal system along this dimension – a reduction in managerial private benefits. We model the increase in the index of legal and judicial efficiency L, which shifts out the marginal productivity of physical capital and therefore the demand for equity funding by domestic firms. We also use models to study three different factors on the equilibrium on the domestic equity market. We do so first under the assumption of perfect international integration of the equity market and then under the assumption of internationally segmented equity market.
3.3 Data analysis methods
Descriptive analysis and relative analysis are both used in this dissertation.
3.3.1 Descriptive Analysis
Descriptive analysis is generally used to find the distribution of a data series (Newbold, Carlson and Thorne, 2008). It aims to give a statistic description of the data investigated, such as mean, median, maximum, minimum, and frequency analysis as well. Some statistical tables and figures are often resorted to. The tool for descriptive analysis is Microsoft Office Excel 2003, which provides tables and figures to give a clear understanding of the examined data.
3.3.2 Relative Analysis
Relative analysis is used to analyze the relationship between different changeable variables using statistic models to address the hypothesis. The relative analysis in this dissertation aims to explore the relationship legal institutions and international equity market in China. The software package SPSS 15.0 was used to make a relative analysis.
3.4 Ethical Issues
There are various stages in the process of conducting research that arouse ethical issues. The ethics standards in research are set out to ensure that no-one is harmed in the researching activities (Cooper and Schindler, 2006). The research in this dissertation has been carried out in accordance with the London Metropolitan University’s ethical requirements and those of the Social Research Association. All the respondents of the research will be informed of the purpose and processes of this research, and the decision about whether to participate in it will be made by the respondents themselves. On the other hand, the information and data collected from the respondents will all be kept confidential for the purpose of protecting the privacy of these enterprises and individuals. All the findings and achievements of this research will only be used for the academy, and never for the purpose of business and commerce.#p#分頁標題#e#
3.5 Summary
The methodology of this dissertation, including data collection methods, research methods, and data analysis methods are established in detail respectively in this chapter. In the last section, the ethical issues during the research are addressed.

Chapter 4 Findings
This chapter is design to drawing on the findings of relationships of legal institutions and equity market in EU and China. The equity market and the impact of the legal institutions of EU and China will be analyzed in details.
4.1 Relationship of legal institutions and equity market in EU
4.1.1 Development of Equity Market of EU
Over the years, the EU's securities market has been in the direction of integration. In 1979, based on the formal establishment of the European Monetary System, the EU has promulgated the "access orders", "listed a list of commands" and "command reports the transition period," which have established basic rules for the minimum conditions, prior to listing and disclosure of information of the European Union listed companies to regulated the equity market of Member States. After 1989, for the establishment of the EU Single Market, the EU adopted the "joint investment treaty convertible securities", "investment services directive" and "Financial Services Action Plan" for the investment institutions in the EU Member States to establish branches in the provision of financial services, cleared the road for the cross-border securities transactions within the EU. With the launch of the euro, the European capital market integration has been greatly accelerated. In April 2000, Paris, Amsterdam and Brussels Stock Exchanges merged to form the second largest stock market in Europe.
The integrated development of the securities market in the EU, the rise of shareholder culture in the EU and the European investors were increased rapidly, the stock market has been expanding, portfolio transactions in the role of economic has been improved. At present, the EU government bond market has exceeded 40% compare to the United States, corporate bonds has been doubled and redoubled, and the sum of stock market value of the market has been more then a half than the value of the United States. There have been about 20% persons in Germany, Spain and other countries who hold shares (Eurostat, 2008).
4.1.2 Status of Equity Market of EU
Following table 1 is the general status of stock market of EU in 2008. From the table, it shows that the sock is in a decline tendency from 9361.6 in Jan 2008 to 5531.8 in Dec 2008. All markets of the EU members are in decline tendency in 2008. Details are showing in the following.
Table 1 Stock market capitalization - end of period - Milliards of euro – NSA 2008
geo/time 2008m01 2008m03 2008m05 2008m07 2008m09 2008m11 2008m12
Euro area : : : : : : :
Euro area 12 : : : : : : :
EU 27 9361.6 9000.4 9454 8239 7180.8 5630.4 5531.8#p#分頁標題#e#
EU 25 9339.4 8966 9414 8206 7154.9 5621.6 5523.9
EU 15 : : : : : : :
Belgium : : : : : : :
Bulgaria : : : : : : :
Czech Republic 43 45.2 48.6 48.9 39.9 31.4 29.6
Denmark : : : : : : :
Germany 1253.8 1209.2 1292 1134 979 774.4 797.1
Estonia : : : : : : :
Ireland 94.8 88.7 87.7 64.5 51.5 38.1 35.5
Greece 156.4 146.5 143.6 119 99.6 69.1 65.3
Spain 1105.6 1098.3 1197 1037 885 682.3 680.6
France : : : : : : :
Italy 647.1 604.1 625.9 534.7 480.3 383.6 374.7
Cyprus 9.5 13.2 14.1 13.1 9.7 6.2 5.7
Latvia : : : : : : :
Lithuania : : : : : : :
Luxembourg 95.4 105.3 125.3 111.4 76.2 47.9 47.8
Hungary 27.6 25.7 28.4 28.5 23.1 14.2 13.2
Malta 3.8 3.6 3.3 3.2 3 2.7 2.6
Netherlands : : : : : : :
Austria 142.5 140.8 138.3 117.3 85.4 55.6 54.8
Poland 123.8 128.6 130 126.2 99.2 71.3 67.9
Portugal : : : : : : :
Romania : : : : : : :
Slovenia 17.9 15 15.1 14.5 12.4 9.4 8.5
Slovakia 4.6 4.6 4.7 4.7 4.8 4.3 3.9
Finland : : : : : : :
Sweden : : : : : : :
United Kingdom 2343.9 2144.5 2289 2038 1808.2 1484.5 1424.1
Norway 192.2 198.5 234.7 197.8 146 99.4 106.5
Source: EuroSTAT (2009)
4.1. 3 Major Problems exist in Equity Markey of EU
Although the EU integration in the securities market has achieved some success, take the EU's securities market as a whole, there are still a range of issues.
(1) The Decentralized equity market has bringing scale not economic and low liquidity. 15 EU member states has its own securities market, the stock market as an example, the highest in the world apart from the list of the top six in London, Frankfurt and Paris in addition, there are more than 10 markets in Europe, including Milan, Madrid, Lisbon, etc. with dozens of small and medium-sized exchanges, the total value of the EU15’s market only equaled the New York Stock Exchange. Not only that, some within the country's securities market is quite fragmented, for example, Germany, apart from Frankfurt, including another 7 markets, including Stuttgart Stock Exchange. Stock market dispersion, reduced market liquidity, so that Europe's investment and financing costs have been higher than the United States, the economic advantages of component if EU single market can not exert, it has been a serious impediment to the economic development of the European Union.
(2) The equity market of EU lacks a rule of delivery. First of all, laws and regulations is inadequate, the EU's attempt to standardize the development of the EU equity markets, it is lacking of clear rules to define and explain, exist the contradictions between the different requirements, the implementation of scale is also inconsistent; Secondly, the rules of the Securities institutional is different in the Member States, Thirdly, the EU decision-making process is cumbersome and complex, each legislative average time-consuming for more than two years, with the result that the EU launched the euro did not seize the opportunity to accelerate the EU's securities market reform, the EU risk investment in financial derivatives development and innovation obviously are lagging behind the United States. Fourth, the regulatory system is confusion; the EU has 40 member institutions to engage in the securities market, there are big differences among the regulatory rule-making, mutual split, rights and responsibilities, there is no unified regulatory in European Union level. Finally, settlement systems are not connected and cross-border transactions cost a lot. #p#分頁標題#e#
(3) Economic, political, cultural and other factors affect the integration of the development of equity markets. Different Member States legislative system, the tax system, political and cultural differences impede the EU's securities market development, in which different tax system and corporate culture hinder the development of the equity market. States securities business taxes and tax rates are not entirelyDissertation is provide by Custom Thesishttp://www.ttc-switch.com/

 consistent, and it is difficult to reach a consensus in the area of taxation that countries are for their own economic interests. Member States of different corporate governance structure, competition policy, the corporate culture make the difficulty in the operations and mergers for the equity market.
(4) EU member states join the European Monetary Union not synchronized. With the launch of the euro, clearing and pricing in the euro zone financial market can use the euro, but the United Kingdom has drifted away from the outside the euro zone, but still nowhere in sight when it joined. In addition, after the EU's eastward enlargement, the new members will not immediately join the European monetary union, monetary union is not synchronized will be more serious problems, this is bound to slow down the process of European equity market integration.
4.1.4 Main Initiatives in the Reform of Equity Market of EU
Facing the equity market problems, the enormous pressure of competition of the continuous innovation and development of the United States financial markets and the challenge of financial globalization, the EU is determined to speed up the pace of stock market integration, accelerate the reform of securities markets. Reform of the EU's securities market is to start the euro as an opportunity, within the European Union to set up a open, fair and transparent equity market legislation rules to protect the interests of investors, to guard against financial risks and maintain the confidence of investors in the equity market, to promote competition in the market, push for the EU securities markets. And the decision-making process, regulatory procedures, rules and transparency are also the most important characteristics for modern civilized society.
Basically, there are three initiatives in the reform of equity market of EU. (1) Speed up decision-making process of the EU equity market reform, so that make the decision-making procedures simplified. (2) Amend the directives and measures of the regulation of EU equity market, to make it applicable for requirements of the development in modern financial markets, to form a unified EU rules governing the securities. (3) Member States speed up the country's financial regulatory system, its basic orientation is to build on the banking, securities and insurance regulators to implement a single unified financial regulatory body, in order to clarify responsibilities, improve management, reduce costs, and increase its transparency. #p#分頁標題#e#
4.1.5 Prospects for the Development of the EU Equity Market
EU securities market reform initiatives and the euro is about to flow for the deepening of the integration of the EU securities markets has injected new vitality into the European Union, unified equity market will not be reversed, which will promote the EU's economic development, to change the current pattern of international capital markets, to speed up the formation against the United States and another of the world Securities and Exchange Center. However, in the process of integration, there are still many uncertainties and insurmountable obstacles, a fully integrated securities market in the European Union need for a long time. Firstly, Circulation of the euro will make the forthcoming integration of the EU to further deepen the securities market. Secondly, Europe's main stock exchange will go from the competition to the joint. Thirdly, the development and integration of EU's equity market will change the existing pattern of international capital markets, and accelerate the formation against the United States. Finally, the development of equity market of EU is difficult to overcome obstacles for the integration process of EU; it will take a long time but can not be achieved overnight.
4.2 Relationship of legal institutions and equity market in China
4.2.1 Regulatory status quo and the main problems of China's equity market
Previously, equity market regulation were mainly by the People's Bank of China, Commission for Restructuring the Economy, the State Commerce and Industry Bureau and other government agencies and the Shanghai and Shenzhen local government participation in the management of the market. The establishment of the State Council Securities Committee and the China Securities Regulatory Commission, State Council Securities Commission is responsible for regulation of the equity market, the China Securities Regulatory Commission as the executing agency for the securities commission and undertakes the supervision of China's securities market mission. State Council Securities Commission has withdrawn the same year confirmed that the China Securities Regulatory Commission for the securities regulatory authorities.
With the development of the securities market, China's securities law system has also gradually built up, such as the "Company Law", "Treasury Regulations", "stock issuance and trading Provisional Regulations on the Management," "Interim Measures for the Prohibition of securities fraud," "Stock management approach "," public offering company information disclosure system ", a series of securities laws and regulations have been promulgated by the Executive. As a fundamental law of the "Securities Act" introduction, and further establishes the legal norms of China's securities market framework. To Shanghai and Shenzhen Stock Exchange set up for the logo, China's securities market is a short span of ten years of foreign securities markets through centuries of natural evolution process of development, it should be said that the Government actively promote the credit, however, goes without saying that in the process of rapid growth, there are still many problems in China's equity market: regulatory system lack long-term planning.#p#分頁標題#e#
China's equity market from scratch and developed to the scale of success. However, due to the rapid development of the market, the Government regulatory authorities struggling to cope with the daily affairs of a large number of complicated works inadvertently neglected the basic regulatory system to market development need to be solved. In order to solve some short-term convex significant problems as soon as possible, it always take first-aid approach, and even the way to an executive order to force regulation and control the market, even though a temporary easing of the situation, it has brought unexpected dangers for the future market development and regulatory work. The existence of regulatory is lag and the effectiveness is weak. Despite China's equity regulators in recent years stepped up its fight against fraud and manipulation efforts, but often after the administrative supervision of supervision, there was a significant lag and the effectiveness is weak.
From the occurrence of irregularities to the regulatory agencies to make punishment, often indemnity lasted a long time; there is an obvious regulatory act of the lag. Such as "Sino-Kuwaiti venture" manipulating stock prices in the event of acts of a few years later was discovered, and "QMY" incident was investigated and dealt with the process as long as two years. On the other hand, the cost of relatively limited monitoring force to investigate some market not deal with fraud, falling through the openings, so that offenders have chances for a risk. The punishment for irregularities is too light, In fact, the irregularities of listed companies but the punishment was passed on to the shareholders of the Company, there is no fault of the small shareholders are often the worst affected. Corresponds to assume direct responsibility for the violations the company's executive’s punishment is too light, the effect weaken the regulation.
Securities regulatory decision-making has not been scientific. At present, China's equity regulatory system determines that the China Securities Regulatory Commission is the sole securities market regulatory authority, on the one hand, improves the implementation of the securities regulatory authority of the decision-making, but on the other hand, may be detrimental to the scientific nature of decision-making. China's equity regulator, as government representatives, except to assume regulatory responsibilities, is also charged with cultivating and improving the functions of the securities market, and the current economic reform in the financial system, the focal point of innovation and reform is involved in all aspects of systems engineering, which determines the context of different areas of the financial regulations and policies between the high degree of relevance is binding. For example, the SFC may be a particular measure in line with the objectives of a single equity regulator optimized, but because of management and other financial institutions in the partition state, its regulatory decision-making may not be able to meet the country's overall financial and economic development of the best results, so the equity regulatory decision-making is lacking of scientific inevitable. Investor protection mechanism is not perfect.#p#分頁標題#e#
4.2.2 Suggestions on the improvement of China's equity market
Equity market plays an increasingly important role in the national economy, it can be predicted with the development of the equity market, equity regulators will face unprecedented challenges. With the actual situation of China's equity market is suited to an efficient equity regulation, it is an important prerequisite to protect the healthy development of China's equity market. Following from the supervision of the legal system construction, supervision of listed companies, the independent director system, the securities market regulatory system, such as the four aspects of perfecting China's securities market regulatory measures and proposals: the law on securities market regulation system, it is suggested in the following aspects:
Establish the legal status for the equity market supervisory authorities, further clarified the legal status of the securities regulatory agencies of the terms and conditions; strengthen the legislative building, the legal system to strengthen the equity regulatory system and the complete package, and enhance the unity of the legal system and integrity; enhanced equity regulatory laws and regulations of the scientific and operational, and strengthen the effectiveness of the content of the rule of law; establish and improve the equity regulatory mechanism for the implementation of laws and regulations to eliminate the phenomenon of law and strengthen law enforcement; adapt to the equity networking and along with the development trend of market opening as soon as possible to formulate appropriate rules and regulations related to supervision. From the norms and the development of two listed companies take a good job of monitoring work.
In strengthening the supervision of listed companies at the same time, and strive for the healthy development of listed companies create a favorable external environment to regulate and stimulate the sustainable development of listed companies. SFC sent bodies to strengthen the regulatory functions, establish and improve the dispatch mechanism to monitor performance appraisal. Focus on strengthening the supervision of information disclosure of listed companies, and enhance the effectiveness of the disclosure of information. To strengthen the supervision system and conscientiously on listed companies, do a good job in monitoring the work of the listed companies.
First of all, the establishment of independent directors should have the social status, enhance the independent directors of listed companies to participate in the greatest degree of decision-making, nurture and build the pool of independent directors; Secondly, a clear distinction between independent directors and board of supervisors of the different duties, give full play to the independent directors of listed companies in the normative role of the operation; Finally, the strengthening of independent directors on the regulations and the supervision of the implementation of various rules and regulations, and improve the system of independent directors to run the external environment. #p#分頁標題#e#
The establishment of a diversification, the structure of multi-level and mutual coordination between the checks and balances and efficient securities market regulatory system, and gradually change the current only by the SFC's regulatory rule-making monopoly situation, will direct effect of narrowing the administrative supervision of the scope of the market. Stock Exchange and the Securities Industry Association allow self-regulation to fill the administrative supervision of the main systolic left blank, and strengthen self-regulatory supervision of administrative checks and balances; many bound and minimize the government agencies in law enforcement corruption.
In addition to the above aspects of the issues, it is worth mentioning that on the supervision of the supervision in China is almost a blank, and therefore strive to promote the regulation and mercerization of the rule of law, establish an effective mechanism of checks and balances, including internal checks and balances and external checks and balances mechanism thus to protect the public and media oversight powers, in order to strengthen supervision by public opinion society.

Chapter 5 Discussion on the Findings
This part will first compare the macro economic environment between EU and China by the analysis method of PEST which refers to political, economic, social and technological factors. And then, this part will compare the differences of financial system between EU and China by the discussion on each characters of financial system and the evidence of operation.
5.1 PEST Analysis of EU
We considered the PEST analysis method in this part to analyze the macro-economic-environment of EU. We will discuss in the order of that content: political factors, economic factors, social factors and technological factors.
5.1.1 Political Factors of EU
5.1.1.1 Political system of EU
According to Hix (2007), unlike the most of the international organizations, the EU's political system is infiltrated with a federal component, or is between the confederation and the Federation. Basic document of the European Community "Treaty of Rome," the provisions of its purposes is: to establish the ongoing, increasingly close joint foundation, removing barriers to split between the people in European countries to ensure the economic and social progress, and continuously improve people's lives and employment conditions, as well as through the common trade policy to promote international exchange. On revising the "Treaty of Rome" and "a single document" emphasized: the European Community and European cooperation is aimed at effectively promoting the common development of European unity, jointly safeguarding world peace and security and make its contributions. There are many institutions under the EU government, such as the Council of the European Union, The European Commission, The European Parliament, The Court of Justice, The Court of Auditors, The European Economic and Social Committee, The Committee of the Regions, The European Central Bank and The European Investment Bank (Craig and Gráinne, 2007). #p#分頁標題#e#
5.1.1.2 The economic system of EU
According to European Commission (2007), European economic integration is achieved by the implementation of a common economic policy in European Union. The most representative thing is the monetary union, the introduction of the euro to establish the Eurozone in January 2002. All other EU member states, except Denmark and the United Kingdom, are legally bound to join the euro when the economic conditions. The euro, and the monetary policies of those who have adopted it in agreement with the EU, is under the control of the European Central Bank (ECB) (European Commission, 2007).
5.1.2 Economic Factors of EU
5.1.2.1 Economic situation of EU
According to EuroSTAT (2008), the GDP of European Union in 2008 was 12,172,536 millions in euro, in which the GDP per capita was 25,000 euro. Details are showing in following table 2. According to Smolinska (2008), despite torments on international financial markets, GDP in the euro area grew by 2.7% and in the EU27 by 2.9% in 2007. Growth in the euro zone and in the EU27 is expected to slow down to 2.2% and 2.4%, respectively, in 2008 and to 2.1% and 2.4% in 2009. Economies are likely to be even less dynamic in 2008 (US 1.7%, Japan 1.9%) but are expected to rebound in 2009 (US 2.6%, Japan 2.3%). Details are showing in the following figure 1.
Table 2 The GDP (PPP) and the GDP (PPP) per capita for the European Union and for each of its 27 member states, sorted by GDP (PPP) per capita in 2008
Member States GDP (PPP) 2008
millions of
euro GDP (PPP)
per capita 2008
euro Percentage of EU27
average GDP
(PPP) per capita 2008
European Union 12,172,536 25,000 100%
1 Germany € 2,309,810 28,100 111%
2 United Kingdom 1,847,105 28,800 114%
3 France € 1,744,444 27,600 108%
4 Italy € 1,500,475 25,200 98%
5 Spain € 1,189,174 26,700 103%
6 Netherlands € 530,564 32,500 131%
7 Poland 515,608 14,000 55%
8 Belgium € 319,867 29,300 118%
9 Sweden 274,499 30,300 123%
10 Greece € 271,206 24,900 97%
11 Austria € 264,472 31,800 125%
12 Romania 244,289 10,300 45%
13 Czech Republic 209,773 21,100 82%
14 Portugal € 194,502 18,700 73%
15 Denmark 171,298 30,500 119%
16 Hungary 158,304 15,900 63%
17 Ireland € 157,070 36,300 140%
18 Finland € 155,640 28,800 115%
19 Slovakia € 98,655 17,800 71%
20 Bulgaria 76,400 10,000 39%
21 Lithuania 50,515 15,700 62%
22 Slovenia € 44,429 23,600 91%
23 Latvia 32,802 13,000 56%
24 Luxembourg € 31,376 70,400 273%
25 Estonia 24,005 17,400 68%
26 Cyprus € 18,109 23,800 92%
27 Malta € 7,824 19,800 77
Source: EuroSTAT (2008)
Figure 1 GDP comparison with Japanese, US and EU from 2001 to 2009 in predict

Source: EU ECONOMIC REPORT February 2008
5.1.2.2 Inflation Rate of EU#p#分頁標題#e#
As Smolinska (2008) stated that, the inflation of European Union has remained stable over the fourth quarter of 2007 both in the euro area and the EU27 with respectively 3.1% and 3.2% in December. The rate in November was 3.1% for both areas. Although stable, inflation showed a higher level compared to last year. In December 2006, it was 1.9% for the euro area and 2.2% for the EU27.The high level of headline inflation remained mostly constituted of the acceleration in oil and food prices combined with unfavorable base effects of last year’s decline in energy prices.
5.1.2.3 Interest Rate of EURO
According to Smolinska (2008), the interest rate on the marginal lending facility is currently at 5% and the interest rate on the deposit facility is at 3%. Details are showing in following figure 2. On the foreign exchange rate markets, the dollar continued to fall in the fourth quarter of 2007, mainly due to contrasting US economic results, concerns about developments in credit and housing markets and resulting uncertainty. The euro-dollar exchange rates were very unstable in January 2008 and ranged from 1.4895 to 1.4482.The exchange rate of Euro to Yen reached a pick of 165.9 in November 2007. On 14th February the euro stood at 1.4626 USD and 158.22 JPY. Details are showing in the following figure 3 and 4.
Figure 2 Interest Rates in Eurozone, US and Japan from 2000 to 2007

Source: Smolinska (2008)
Figure 3 Japanese GDP growth vs exchange rate Euro/Yen from 2001 to 2007

Source: Smolinska (2008)
Figure 4 US GDP growth vs exchange rate Euro/Yen from 2001 to 2007

Source: Smolinska (2008)
5.1.3 Social Factors of EU
5.1.3.1 Proportion of the population structure of EU
The founding members of the EU were France, the Federal Republic of Germany, Italy, the Netherlands, Belgium and Luxembourg. There are now 27 member countries by the January 2007, they are: France, Germany, Italy, the Netherlands, Belgium, Luxembourg, Britain, Denmark, Ireland, Greece, Portugal, Spain, Austria, Sweden, Finland, Malta, Cyprus, Poland, Hungary, the Czech Republic, Slovakia, Slovenia, Estonia, Latvia, Lithuania, Romania, Bulgaria (Craig and Burca, 2006).
5.1.3.2 People’s Living Standard of EU
According to Smolinska (2008) and Eurostat (2008), the per capita of GDP of EU was 25,000 in 2008. And the household saving rate in 2006 was more than 2 percentage points higher in the euro area (13.6 %) than in the EU (11.3 %). The private consumption of EU 27 in 2008 was increased 2.2% from the same period in 2007, and the consumer prices of EU 27 in 2008 was increased 2.2% from 2007.
5.1.3.3 The Unemployment Situation of EU
According to Smolinska (2008), from November to December 2007, the unemployment rate remained stable at 7.2% in the euro area, while the EU27 recorded a slight improvement from 6.9% in November to 6.8% in December. Both the euro area and the EU27 registered a higher rate for the same period last year with the respective figures of 7.8% and 7.6%. Details are showing in following figure 5. #p#分頁標題#e#
Figure 5 Euro area and EU 27 unemployment rate from 2000 to 2007

Source: Smolinska (2008)
According to Eurostat (2008), the seasonally adjusted unemployment rate in the European Union (EU27) in November 2008 was 7.2% compared to 7.5% in March 2007. The unemployment rate (EU25) had already declined in prior years from 8.9% in March 2005 to 8.4% in March 2006. Following figure 6 shows the details of Euro members’ unemployment rate in March 2008. And the following table 3 shows the details of 27 EU member’s unemployment rate from 2005 to 2008 compared with the United States and Japan.
Figure 6 Unemployment rate by country in the EU-27 in March, 2008

Source: Eurostat (2008)
Table 3 27 EU member’s unemployment rate from 2005 to 2008 compared with the United States and Japan
% Unemployment
Member State Mar-05 Mar-06 Mar-07 Mar-08
European Union 8.9 8.4 7.3 6.7
United States 5.1 4.7 4.4 5.1
Japan 4.5 4.1 4 3.9
Austria 5.1 5.1 4.5 4.1
Belgium 8.4 8.2 7.7 6.9
Denmark 5.4 4.3 4.1 3.1
Finland 8.5 7.9 7 6.3
France 9.7 9.1 8.6 7.8
Germany 9.8 8.7 8.6 7.3
Greece 9.9 9.6 8.6 7.9
Ireland 4.5 4.2 4.6 5.6
Italy 7.8 7.7 6.1 6.1
Luxembourg 4.3 4.8 4.9 4.5
Netherlands 4.9 4 3.4 2.6
Portugal 7.4 7.6 8.2 7.4
Spain 9.9 8.7 8.1 9.3
Sweden 6.3 7.2 6.6 5.6
United Kingdom 4.6 5 5.5 5.1
Bulgaria x x 7.5 5.9
Cyprus 5.1 5.2 4.1 3.7
Czech Republic 8 7.7 5.6 4.5
Estonia 8.8 5.3 4.9 5.5
Hungary 6.8 7.4 7.3 7.6
Latvia 9.1 7.6 6.4 5.3
Lithuania 9.2 6.4 4.6 4.5
Malta 7.2 8.1 6.6 5.6
Poland 18 16.8 10.3 7.7
Romania x x 6.6 6.2
Slovakia 16.7 15.7 11.3 9.8
Slovenia 6.4 6.2 5.2 4.3
Source: Eurostat (2008)
5.1.4 Technology Factors of EU
The development of the technology enables the legal institutions to be more transparent, and the controls of legal institutions on the equity market are strong base on the development of internet and the application of modern technology. The supervision on the fundamental of legal institutions and equity market are becoming easy by the use of internet and application of modern technology in EU. It is easily for the EU agencies to manage the institutions by the modern technology. Along with the development of modern technology, the relationship between legal institutions and equity market are becoming stronger.
5. 2 PEST Analysis of China
We considered the PEST analysis method in this part to analyze the macro-economic-environment of China. We will discuss in the order of that content: political factors, economic factors, social factors and technological factors.
5.2.1 Political Factors of China
5.2.1.1 Political system of China
The political party system China has adopted is multi-party cooperation and political consultation under the leadership of the Communist Party of China (CPC) (hereinafter "multi-party cooperation system"), which is different from both the two-party or multi-party competition systems of Western countries and the one-party system practiced in some other countries. This system was established and has been developed during the long-term practice of the Chinese revolution, construction and reform. It is a basic political system that suits the conditions of China. It is a socialist political party system with Chinese characteristics, and a key component of China's socialist democratic politics. (White paper on China's political party system 2007)#p#分頁標題#e#
5.2.1.2 Economic system of China
China once had a socialist, planned economy where the government (one party) controlled and owned all the means and methods of production. After the reform in 1978, it is now near a market economy after privatization of most of the state owned enterprises and opening up to western countries. And the Chinese governments reform the economic system frequently, in order to develop China's economy better. China has the different policies to control the economic, such as the monetary policies, fiscal policy, trading policy and economic growth policy. It will also make the economic targets in every five years.
5.2.2 Economic Factors of China
5.2.2.1 National economic situation of China
In the last 30 years the growth rate of Chinese economy has been almost miraculous, averaging 8% growth in Gross Domestic Product (GDP) per annum. The economy has grown more than 10 times during that period, with Chinese GDP reaching 3.42 trillion US dollars by 2007, details see following figure 7. In Purchasing Power Parity GDP, China already has the biggest economy after the United States. Most analysts projected China to become the largest economy in the world by this century using all measures of GDP. According to the data from the National Bureau of Statistics of China (2007), the GDP of China was 210871.0 billion RMB in 2006. It was a 14.69% more than the year 2005.
Figure 7 2003-2007’s GDP and the Growth Rate of China
 

Sources: National Bureau of Statistics of China, 2007
5.2.2.2 Inflation Rate of China
During the winter of 2007-2008, inflation ran about 7% on an annual basis, rising to 8.7% in statistics for February 2008, released in March, 2008. The food and fuel sectors were major problem areas, with meat and fuel posing special difficulties. Shortages of gasoline and diesel fuel developed in the fall of 2007 due to reluctance of refineries to produce fuel at low prices set by the state. These prices were slightly increased in November, 2007 with fuel selling for $2.65 a gallon, still slightly below world prices. Price controls were in effect on numerous basic products and services, but were ineffective with food, prices of which were rising at an annual rate of 18.2% in November, 2007 (Beijing University of Chinese National Accounts and Economic Growth Research Center, 2008). According to the National Bureau of Statistics of China, by January 2008, the inflation rate rose to 7.1%, which BBC News described as the highest inflation rate since 1997, due to the winter storms that month. China's inflation rate jumped to a new decade high of 8.7 percent in February 2008 after severe winter storms disrupted the economy and worsened food shortages, the government said March 11, 2008. Throughout the summer and fall, however, inflation fell again to a low of 6.6% in October, 2008 (China Daily, 2008).Well, in the last few years China inflation changes much. From 2000 to 2002, the rate of inflation has decreased year by year. Details see following table 4.#p#分頁標題#e#

Table 4 rate of China annual inflation from 2000 to 2006
Year % of change
2000 0.4
2001 -0.7
2002 -0.8
2003 1.2
2004 3.9
2005 1.8
2006 1.5

Sources: China National Bureau of Statistics
5.2.2.3 Interest Rate of China
China raised its benchmark interest rates in 20 December 2007 for the sixth time that year, the latest in a series of tightening steps to contain inflation and prevent the world’s fourth-largest economy from overheating. However, it also lowered the rate for demand deposits -- those that can be withdrawn at any time -- to encourage savers to tie up their cash for longer periods rather than having it readily available to shift into shares or property. According to the Bank of China, the interest rate in August 2008 is 2.56%. The interest rate has flow up and down strongly since the year from 1998 until now, following table 5 shows the interest rate paid on required reserves in percentage.
Table 5 Interest rates paid on required reserves, %
1998.03.25 5.22
1998.07.01 3.51
1998.12.07 3.24
1999.06.10 2.07
2002.02.21 1.89
2003.12.21 1.89 (with new, lower, rate on excess reserves)
2004.10.09 5.22
2006.04.28 5.4
2006.08.19 5.58
2007.03.18 5.67
2007.05.19 5.85
2007.07.21 6.03
2007.08.22 6.21
2007.09.15 6.48
2007.12.21 6.57

Source: People's Bank of China
Note: Before December 2003, there was only one interest rate, 1.89%, for both required and excess reserves. After this date, however, while this rate was maintained for required reserves, excess reserves were paid a new, lower rate of 1.62%. On March 17th, the rate was lowered again to 0.99%（The PBC Shanghai Head Office, 2006).
5.2.3 Social Factors of China
5.2.3.1 Proportion of the population structure of China
China is a country with large population, according to the National Bureau of Statistics of China (2007) there were almost 13.15 billion populations of mainland China in 2006, it was a 0.53% increase rate than the year of 2005 and 9.20% of the total population was the people with age 65 and above, basically, china’s population is in a tendency of aging. Only 6.22% of the population educated to tertiary level and above, there is 8.79% of the population never educated.
5.2.3.2 The people's living standards of China
China statistical yearsbook 2007 states that the per capita disposable income of urban residents was 11759 RMB in 2006 and it is 12.07% more than 2005; the per capital annual expenditure on consumption of urban residents in 2006 was 8697 RMB and it was 9.49% higher than 2005; the per capita savings deposits was 12293 RMB in 2006 and it was 13.96% increased from the year 2005; the area of housing construction per person was 26.1 Sq m in 2006 and it was 28.62% more than it in 2005; and the average consumption expenditure per person of urban residents in residential was 904.19 RMB in 2006. #p#分頁標題#e#
5.2.3.3 The Unemployment Situation of China
Unemployment is measured annually as the percent of the labor force that cannot find a job. The labor force comprises adults who want to work. Uncounted are those who do not seek employment, or who have become discouraged enough to stop looking. Details are in appendix. Source: International Monetary Fund. Economies are powered by consumer spending and savings investment. Unemployed workers earn no wages; they spend little and save less. Economies with high levels of unemployment are stalled economies. China’s economy is likely to experience stagflation. Department of Labor and Social Security show that in the past five years, China's urban new jobs each year are more than 9,000,000 people in 2007 to reach 12,040,000 people, creating an active employment policy since the implementation of the best level; a total of 25,000,000 state-owned and collective enterprises laid-off workers Were re-employed; the registered urban unemployment rate from the 4.3 percent decline year by year, by the end of 2007 to 4.0 percent. In reality, the Chinese government has been inclined to strengthen structural policy while weakening total quantity policy. This round of tightening can be said to be selective “spot kill” by treating different things differently. For instance, different industries and enterprises are treated differently on a selective basis. Such control is structural control but the government does not say whether to contract or expand the total demand (Zhou, 2008).

Such control means may sharpen the focus of macro-control but it also contains administrative means that may hurt the normal functioning of the market economy.
This is why some people allege that China’s market economic operation has retreated as a result of this round of macro-control. To expand total demand will expand demand and stimulate consumption. In this case, structural adjustment will not work and as a result an opposite policy direction must be adopted. In my opinion, the government should no longer employ any administrative control means in either case. China’s economy is inflation-prone in the short run but consequently unemployment-stricken in the long run. Therefore, monetary policy can no longer be further tightened because there is no room for tightening, as the statutory deposit reserve ratio has reached 17.5% as of today. When inflation raged at approximately 20% in 1994, the statutory reserve ratio was raised only to 13% or so. The room for further tightening is therefore very limited (Zhao, 2002).
5.2.4 Technology Factors of China
As the same to EU, the development of the technology enables the legal institutions to be more transparent, and the controls of legal institutions on the equity market are strong base on the development of internet and the application of modern technology. The supervision on the fundamental of legal institutions and equity market are becoming easy by the use of internet and application of modern technology in China. #p#分頁標題#e#
5.3 Financial System of EU
5.3.1 Financial System Analysis of EU
5.3.1.1 Summaries of the financial system of EU
The development of European integration gave birth to a very unique model, it goes beyond the general government and intergovernmental organizations, and are far from forming a supra-national entities. The development of European integration is always able to create a miraculous the fruits of cooperation, although the twists and turns constantly, continue to promote the deepening of integration. Along with the wholeDissertation is provide by Custom Thesishttp://www.ttc-switch.com/

 process of EU integration and European integration, the coordination of fiscal policy is an important part. After the setup of euro, monetary policy is formulated by the European Central Bank in the euro-zone member countries. States have only the right of the formulation of fiscal policy, which is a challenge for the traditional economics, monetary policy and a fiscal policy to achieve economic goals (Allen, Bartiloro, and Kowalewski, 2005).
5.3.1.2 Main elements of financial system of EU
The "Maastricht Treaty" (refers to as "Mayotte") entered in 1993 and "Stability and Growth Pact"(also known as "the Treaty of Amsterdam", referred to as "the Convention") entered in 1997 provide the basic rules of EU fiscal policy. "Mayotte" has made provisions in principle of fiscal policy for member states, that is, since 1994, the fiscal deficit (ie, the deficit rate) accounted for GDP of the EU member states can not exceed 3%, government debt accounted for the proportion of GDP (that is, debt rate) can not exceed 60%. "Convention" has further clarified the "Mayotte" based on the principles of fiscal policy, determined the coordination of the EU fiscal policy rules, the punishment excessive deficit procedure, and the establishment of early warning mechanism to monitor the financial performance, to ensure that Member States in the mid - ages (from 1997-2004) to achieve financial balance or slight surplus basically (Allen, Bartiloro, and Kowalewski, 2005).
"Convention" is considered as the EU's fundamental guarantee of economic stability, but also the cornerstone of stability for the euro. In accordance with the "Convention", Member States must determine the medium-term budgetary objectives to achieve the timetable in order to realize the budget in 2004 the basic balance or slight surplus; The coordination and supervision of formulation and implementation of fiscal policy on EU Member States, if convicted of the one member may be or has been a deficit rate of more than 3%, it is required that a warning to the country and called for its correction; if the Member States do not take any implementation, the EU will launch the excessive deficit procedure penalties. Deficit rate have consecutive for three years more than 3% of any member, the maximum fine is equivalent to 0.5% of gross domestic product of the member (Allen, Bartiloro, and Kowalewski, 2005).#p#分頁標題#e#
5.3.1.3 Main characteristics of financial system of EU
The EU's budget only accounts for more than 1% of the whole Union’s GDP, while the members of the Budget (including social security funds) are usually accounted the gross domestic product by 50%. There are only the administrative expenses and agricultural expenditure in the EU budget. "Mayotte" ordains that only when a policy objective within the EU are better realize by countries, then the EU will intervene, therefore, it is currently that the European Union itself is essentially non-existent the social security, law and order and education, etc. expenditures. Fiscal policies and regulations on EU members are mainly regulatory in nature, mainly characterized by the following: 1) The EU fiscal policy is the assistant for the monetary policy. 2) 　　The ceiling targets rate of deficit and the debt ratio is based on the negotiation of members countries of EU rather than the measurement of scientific indicators. 3) Deficit rate has a mandatory binding on member countries, whereas the debt indicators only have reference value for member states. 4) Under the premise to comply with the provisions of the EU deficit and debt, all member states have the own right on the development and implementation of national fiscal policy. And 5) Principal means to reduce expenditure is to reduce the deficit ratio and debt ratio for all members (Allen, Chui and Maddaloni, 2004).
5.3.1.4 Problems of fiscal policy of EU
Generally, according to Allen, Bartiloro, and Kowalewski (2005), there are mainly four problems exist in the fiscal policy of EU, the first one is that there are conflicts between the differences of members’ country-specific with the uniformity of deficit rate control indicators. Secondly, deficit rate cap limits the adjustment of counter-cyclical fiscal policy of member countries. Thirdly, the single fiscal policy faces a greater political risk. Finally, it is difficult to comply with each member of the actual economic situation by the EU monetary policy.
5.3.2 Efficiency of the System of Operation in EU
5.3.2.1 The implementation of the EU fiscal policy
During 1991 to 2000, EU countries are better implemented the requirement of "Mayotte" and "Convention". Since 1991, for the realization of "Mayotte" and "the Convention" provided for a deficit rate of no more than 3% target, the EU country reduced the financial expenditure in general, and actively implements the EU's fiscal policy convergence, achieved remarkable results. By 2000, the EU's average deficit rate dropped to 0.4% from the year of 1990 as 5.3%, in which the deficit rate of euro zone countries dropped from 6% in 1990 to 0.8%. During this period, the deficit rate is decline of all EU countries, it is mainly due to the Member States to take concerted action, in accordance with the "Mayo" and "Convention" requirement to control or reduce government spending. At the same time, the steady economic growth also benefited from the EU in the economic cycle. During 1991 to 2000, the EU's GDP average annual growth rate is 2.1%. Especially after 1997, the annual growth is all more than 2.5%, in which in 2000, the economic growth rate reached 3.3% (Kaiser, and Heilenkötter, 1999)#p#分頁標題#e#
In recent years, the deficit rate of major EU country are continued reached a breakthrough of the ceiling rate of 3%, "Mayotte" and "the Convention" have been serious challenged. Since 2001, the whole economic of EU economy turned into the cool period, the EU economy is in a serious landslide. In order to cope with the challenge of population aging and economic recession, major EU member states regardless the "the Convention" requirement and the European Union warned, taking large-scale increase in government spending or tax cuts stimulate consumption and investment, the government budget situation has also deteriorated. In 2001, Portugal deficit rate reached 4.1%, becoming the first country in violation of "the Convention" of the euro-zone. Germany as a leader of euro zone economy, the deficit rate has reached 3.6% in 2002, exceeds the RU level, and the deficit rate is expected 4.2% in 2003 and 3.9% in 2004. France as the second largest economy in euro zone, the deficit rate reached 3.1% in 2002, and the deficit rate is expected 4.2% in 2003 and 3.8% in 2004. According to the European Union, Portugal and Italy will do the same in 2004 and in 2005 joined the ranks of the deficit over. As the result of the deficit rate of the two countries in three consecutive years was more than 3%, in accordance with the "Convention", they should be punished. But Germany, France is the main EU member countries, by the persuading of the two countries, the EU Finance Ministers Council was final compromised, decided to suspend the procedure of punishment. European Central Bank raised severe criticism on that, considered that the members who did not accordance with the sanctions program of "the Convention", will not impact on the loss of "the Convention", but also made the people lose the confidence on the stable financial policies of EU (Wagner and Iakova, 2001).
Some countries seek to amend the "Convention" as too stringent provisions. Italy, France and other countries in violation of "the Convention" also seek to amend the "Convention", seek to the relaxation of restrictions on members of a deficit in order to implement the tax reduction policy, in turn stimulate the economic recovery. Based on the stability of the euro and the common monetary policy considerations, the European Central Bank firmly opposed to any relaxation of "the Convention". Some experts also considered that the amending of "Convention" will lower the Convention on the seriousness and authority, thus to crack down the people’s confidence on the European Economic and Monetary Union, and affect the long-term development of the European economy. However, the International Monetary Fund on the represented international economic organizations are supported the European Union to amend "the Convention” (Allen, Bartiloro, and Kowalewski, 2005).
5.3.2.2 Direction of adjustment of EU fiscal policy
At present, some EU member states the flexibility to implement or adjust the requirements of "the Convention" on the deficit rate. As a result of these member states in the EU's influence within the larger, under pressure, the EU may have to maintain basic framework of "the Convention" to redefine the content of certain provisions. Specifically, it is possible to adjust the following three aspects. First, redefine the connotations of the fiscal deficit, defined the fiscal deficit as a structural budget deficit in "Convention", and narrowed the calculation of the deficit be slightly caliber, excluded certain deficit factors. At present, the EU is on the research for structural budget deficit, definitions and calculation methods. Secondly, government's investment of financial expenditure is not included in the scope of the deficit calculation. Thirdly is the link of fiscal deficit and debt, the high debt burden countries’ fiscal deficits can not exceed 3%, and it could relax the restrictions on the fiscal deficits of low debt burden countries (Allen, Bartiloro, and Kowalewski, 2005). #p#分頁標題#e#
5.4 Financial System of China
5.4.1 Financial System Analysis of China
Modern Chinese economy sees a transition from traditional planned economy to market economy like the former Soviet Union and Eastern European countries. Meanwhile, it witnesses the same industrialization process as seen in any other developing country. Aims to establish a independent of fiscal-oriented financial system and to realize the commercialization of financial institutions, which will assume sole responsibility for its profit or loss and all the risks, China adopts the reversed way to gradual reform. Through reform, market-oriented micro-foundation and competitive enterprises system has basically taken shape, financial institutions no longer need to support state-owned enterprises; in the mid-to-late stage of industrialization, financial institutions no longer need to fully perform policy financial functions; and China's financial sector has entirely liberalized, financial institutions will face competitions from global extent. It drives some new tendencies in the development of China’s financial, for instance, on the macro side, interest rate and exchange rate liberalization has started and the trend of transformation from divided operation to integrated operation has emerged; and from the structural perspective，indirect financing has started giving way to direct financing.
Details with significant changes in the financial system reforming process are: in 1990, two domestic stock exchanges, the Shanghai Stock Exchange (SHSE) and the Shenzhen Stock Exchange (SZSE) were established, and have experienced remarkable growth since then; In 1992, the famous “Southern Tour” by then Chinese leader Deng Xiaoping lead a period witnessed a sharp increase in foreign direct investment (FDI), a deregulation of the banking sector characterized by the emergence of many new state/local government owned commercial banks, and the re-emergence of Shanghai as the financial center of China; in 1994 interbank lending and in 1997 bond markets were established, and the bank debit/credit cards market expanded rapidly; following the Asian Financial Crisis in 1997, financial sector reform has focused on state-owned banks and especially the problem of NPLs; and in finally, China’s entry into the WTO in December 2001 marked the beginning of a new era, since the eventual opening of the capital account and adopting a floating exchange rate are required by the WTO, increasing competition from foreign financial institutions and frequent and large scale capital flows appears. Until recent years, The People’s Bank of China releases the RMB foreign exchange rate, RMB value increase rapidly.
For a prospection of China's financial system, the overall restructuring and potential listing of Agricultural Bank, and the commercialization reform of China Development Bank indicate that the policy functions of the state-owned banks will be reduced, with commercial features being enhanced; marked by the preparation of Shanghai Financial Futures Exchange, the rapid growth of fixed income product will promote both transformation of financial sector from indirect financing to direct financing and the interest rate liberalization; take approved RMB bonds issuing in HK market as sign, the convertibility of RMB and liberalization of exchange rate mechanism have been further improved; and marked by the approval of fund management company established by commercial banks, financial institutions have started engaging in cross selling and integrated operation.#p#分頁標題#e#
China’s economy is experiencing the fastest growth in the world, and is expected to maintain a relatively high growth in a considerable long period. With further implementation of financial sector reforms and liberalization of the sector, China’s financial sector has the potential to achieve the fastest growth in the global context.
5.4.2 Efficiency of the System of Operation in China
China’s stock markets are smaller than most of the other countries, both in terms of market capitalization and the total value traded as fractions of GDP. China’s banking system is much more important in terms of size relative to its stock markets. China’s banking sector is much larger than its financial markets, and this dominance by the banks over markets is strong and its stock markets are actually relatively more efficient than banks compared to other countries. Thus, China’s financial system is dominated by a large but inefficient banking sector.
As the largest emerging economy, China has attracted a large amount of foreign investment, in terms of FDI, joint ventures, holdings of B share stocks, and so on. China’s FDI inflows are higher than the averages for other Asian countries, developing countries and the entire world, but the outflows are lower than the averages of these regions. The entrance of China to the WTO introduces cheap foreign capital and technology, but free capital inflow and foreign competition and speculation also bring the risk of a twin crisis (foreign exchange and banking/stock market crisis), which severely damaged emerging economies in Asia in 1997. In order to guard against such a crisis, Chinese government introduced a variety of policies toward improving the financial system along with supportive fiscal and trade policies.

Chapter 6 Conclusion and Recommendation
6.1 Conclusion
In conclusion, over the years, the EU's securities market has been in the direction of integration. The integrated development of the securities market in the EU, the rise of shareholder culture in the EU and the European investors were increased rapidly, the stock market has been expanding, portfolio transactions in the role of economic has been improved. Although the EU integration in the securities market has achieved some success, take the EU's securities market as a whole, there are still a range of issues, 1) The Decentralized equity market has bringing scale not economic and low liquidity; 2) The equity market of EU lacks a rule of delivery; 3) Economic, political, cultural and other factors affect the integration of the development of equity markets. And 4) EU member states join the European Monetary Union not synchronized. Whereas as a young man in the equity market of China, however, goes without saying that in the process of rapid growth, there are still many problems in China's equity market: regulatory system lack long-term planning. Due to the rapid development of the market, the Government regulatory authorities struggling to cope with the daily affairs of a large number of complicated works inadvertently neglected the basic regulatory system to market development need to be solved. From the occurrence of irregularities to the regulatory agencies to make punishment, often indemnity lasted a long time; there is an obvious regulatory act of the lag. The regular system in China’s equity market is not scientific and investor protection mechanism is not perfect. #p#分頁標題#e#
The financial system in EU is seeing a highly tendency of interaction and the most representative should be the lunch of euro. Whereas China’s financial is still in a development time. EU government aims to solve the conflict between the member state in order to achieve the interaction of the economy, whereas the China’s government is drawing on the experience learn from developed country to develop its own economy as a whole. The effects of legal institutions on the equity market in EU are not so strongly as it in China due to that EU need to manage different members but China just to manage a single market. However, the control on the equity market of EU is more scientific than China but Chinese control is strong due to its political factors.
6.2 Recommendation
For recommendation on EU equity market, it is suggested that the EU government should speed up decision-making process of the EU equity market reform, so that make the decision-making procedures simplified, amend the directives and measures of the regulation of EU equity market, to make it applicable for requirements of the development in modern financial markets, to form a unified EU rules governing the securities and member states should speed up the country's financial regulatory system in order to clarify responsibilities, improve management, reduce costs, and increase its transparency.
For recommendation on China equity market, it is suggested that the government should establish the legal status for the equity market supervisory authorities, further clarified the legal status of the securities regulatory agencies of the terms and conditions, enhanced equity regulatory laws and regulations of the scientific and operational, adapt to the equity networking and along with the development trend of market opening and strengthen the effectiveness of the content of the rule of law. Some experience of oversea market should also been learned of China’s legal institutions on the control of the equity market.
6.3 Limitation of the Study
While advancing related work with a case study, the paper is not without limitations.
(1) The limitation of examples
This paper considered two equity market for the analysis, aims to compare the differences in the relationships of legal institutions and the equity market. China and EU are been take as the sample to analyze, the paper only analyse the legal institutions and the equity market of the two regions, as the EU is a very complex region in total, it is difficulty to analyze the situations of equity market as a whole. And China’s equity market is still young, there are many problem exist in the legal institutions. There are not other regions for the comparison. The conclusion in this paper is only drawing on the analysis of EU and China equity market and its legal institutions. Thus, the results get from this research is with the limitation of examples support.

(2) Lacking of data support
The discussing is base on the theoretic analysis, and no material data support such as market survey is present in the study. This paper is basing on the empirical analysis not with any calculations and econometrics analysis. The data is just from the authority of the two regions, there are not additional data assistant. As the equity market is in rapid flows, the data use for the analysis in this paper is not so comprehensive, and there are not any questionnaires and interviews taken for the analysis in the research. Thus, the two factors cause the lacking of data support for the research. #p#分頁標題#e#
3) Lacking of academic and research method
The paper only drawing on the journals and reports of the legal institutions and equity market of EU and China to collect the major data and based on the regions’ websites and other journals to collect the secondary source, the research method used in this paper is limited and thus it bring another limitation of the research.
6.4 Suggestions for Further Study
For further study, it is suggested that the researcher could analyse more equity markets for the example in order to get more comprehensive example support for the analysis, and it is better that the researcher could get interview in order to get more comprehensive perspective on the case. Also the interview on the supervisor of the equity market of the selected regions is strongly recommended for the data analysis. In addition, it is also suggested that the researcher could take some questionnaire on the people who are involving in the equity market to detect the impact of the legal institutions of the regions.

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