Stock Market Participation in China: The Effect of Political and Human Capital

Current literature has extensively examined income inequality in post-reform China. Two lines of arguments are noteworthy: one highlighting the ability of elites (especially Communist Party members) to convert their political capital in pre-reform era into new sources of power in the market economy; the other arguing the replacement of political capital by human capital in post-reform era. This article extends the discussion on China’s inequality to a more market-oriented activity—stock market participation.

Stock market was reopened in China in the early 1990s as a symbol of deeper market-oriented reform. China’s stock market is known for its retail investors from ordinary households instead of institutional investors. Therefore, stock market can be an interesting testing ground for household level inequality research in China. To be specific, the article addresses what explains the variety among household participation and asset in stock market. Between political capital (measured by Party membership) and human capital (measured mainly by educational attainment), which one matters more?

Using data from China Household Finance Survey (2012), the article shows that (1) households headed by Party members are more likely than other households to invest in stock markets while their premium in financial assets in stock market is less prominent, (2) households whose heads have a higher educational attainment are more likely to invest to stock markets and possess more financial assets in stock market at the same time, and (3) the impact of educational attainment becomes less important if the household is headed by a Party member. The results suggest while both political and human capital affect the inequality in stock market participation, it can be argued that political capital is more consequential in that it decreases the effect of human capital.