No other big country has relied as heavily as China on overseas capital markets for its local companies to raise capital. This is now at the point that it is severely hampering development of China's domestic capital market. Data compiled by the Shanghai Stock Exchange's research centre show that the combined tradeable market capitalisation of China's two stock exchanges at the end of 2004 was only Y1,200bn, while that of overseas listed Chinese companies exceeded Y2,200bn. Furthermore, this trend - I call it the outsourcing of China's capital market services - is poised to accelerate amid the continuing subdued performance of the domestic stock market.

In today's interlinked world, outsourcing is not necessarily a bad thing; China itself is a main outsourcing destination for manufacturing. But for such a large country, relying mainly on overseas capital markets for economic growth entails some potentially dangerous outcomes: