[SOLVED] What conditions are necessary to develop an

What conditions are necessary to develop an efficient stock market with fair trading? What role does accounting and financial reporting play in stock market development? Consider the case of China:
Those Chinese who think of themselves as street-smart tell a joke about three fools. The first is the boss who plays around with his secretary and ends up her husband. The second is the investor who plays the property market and ends up a homeowner. And the third is the punter who plays the stock market and finds himself a shareholder. This sums up the culture of China’s fledgling capital markets. “Trading, not ownership,” is the approach of China’s investors, says Anthony Neoh, a former head of Hong Kong’s Securities and Futures Commission who is now the chief outside adviser to China’s regulatory body. “That’s what we need to change.”
This marks a shift in China’s capital market reforms. So far, Beijing has focused almost entirely on the “supply side” of the securities market. This has included listing more, and better, companies, and forcing them to adopt better standards of corporate governance and disclosure. Such efforts have a long way to go.
However, the government now realizes that it also needs to work on the “demand side.” At present, China’s stock market, Asia’s second-largest by capitalization, consists of 60m mainly clueless retail investors, driven to trade almost entirely on rumor.64
[T]he balance sheets of Chinese companies are, by common consent, a joke. In January [2001] the government’s official auditing body admitted that more than two-thirds of the 1,300 biggest stateowned enterprises cook their books. Johnny Chen, the Beijing head of PricewaterhouseCoopers, says that even this is an understatement. Quite simply, the SOEs’ numbers are whatever the key man wants them to be. And without genuinely independent directors to chair an audit committee, that will not change.65
Even China’s mostly hapless stock market investor (66m of them, officially) had something to cheer about this month, after the country’s highest court said that shareholders could file individual or class action lawsuits against companies that lie about their accounts. There appear to be a lot of liars about. Around 900 shareholder suits are pending, in a country with 1,200 listed companies.
It remains to be seen whether these steps amount to mere tinkering, or herald the new and bolder approach to financial reform that China badly needs. Its markets for labor, goods, and services are nowadays more liberal than those in some capitalist economies. Its capital markets, by contrast, have changed only cosmetically since the days of central planning. In effect, all capital in China is allocated, one way or the other, by the government, which wastes much of it.
The decade-old stock market is dominated by state-owned enterprises that were listed for political rather than economic reasons. Some two-thirds of the market’s capitalization is not traded, so the state retains total control. There is no corporate bond market to speak of.66
[A]ll is not what it seems in China’s capital markets. For a start, growth in the domestic stock market has outstripped the efforts—game as they are—of the regulators and the legal system to police it. The authorities say that computer matching of share transactions has allowed them pretty much to stop powerful syndicates ramping up share prices. They have even sent the biggest manipulators to jail, yet insider trading is still rife on a heroic scale. Stock exchange executives reckon that the real number of investors is around half the official number: investors use multiple accounts for dodgy share dealings.
The real issue is the quality of the listed companies themselves, says one financial official. Even some of the betterregarded ones indulge in all sorts of market abuses, such as lending money
raised on the stock market to the parent company rather than investing it, or speculating in the stock market on their own account. Almost all companies allowed a listing are the beneficiaries of government favoritism. Their profitability is usually abysmal, their levels of disclosure poor, and—with the state holding roughly two-thirds of the shares of companies listed in Shanghai and Shenzhen—their treatment of minority shareholders appalling.67
[T]he biggest problem is the poor quality of the listed companies. All but a handful are state enterprises, which are approved for an IPO by a political committee rather than by independent underwriters. A 2002 survey by the China Securities Regulatory Commission (CSRC), the top regulator, found that one in ten listed companies had doctored its books, and the finance ministry reported in January [2004] 152 firms it had surveyed had misstated their profits by a combined 2.9 billion yuan. “The stock market has been used to support national industrial policy, to subsidize SOE restructuring, not to allow private companies to raise capital,” says Stephen Green of the Royal Institute of International Affairs.68

Required:
1. Describe the conditions necessary to develop a stock market in an emerging economy.
2. How do these conditions compare to the situation in China?
3. How likely is China to develop a stock market with fair trading? Why do you say so?
4. Outline a plan of reforms necessary to achieve stock market development in China.

Question: What conditions are necessary to develop an