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February 20, 2005
Who Owns the Equity in Chinese Listed Companies?
The Chinese stock markets are queer creatures, if only because of massive state involvement. With nationalization in the 1950s, the Chinese state became the nominal and functional owner of all commerce and industry. The reverse function – privatization – has proved to be a greater difficulty.
Roughly 1,200 state-owned enterprises (SOE) listed on these markets, ostensibly becoming firms owned by shareholders, instead of the state. Closer inspection reveals that the state remains the greatest shareholder in these firms, and they are not easily or readily divested of their interests.
About one-third of the equity in these firms are held in the form of Legal Person (LP) shares, very often owned by state-controlled entities. In contradistinction to past rules on the alienability of LP shares, the Rules on Transfer of Non-Tradable Shares of Listed Companies, which became effective on January 1, 2005, now require share transfer to be registered, conducted through the Shanghai or Shenzhen exchanges and cleared through the China Securities Depository & Clearing Corporation Limited. That is, while many clamor for a resolution of the LP share issue, Chinese law appears to increase state central control, instead of allowing the market to make its own decision.
Approximately a further one-third is held by the state (guojia gu), which may not be traded. Indeed, they aren’t even listed. For somewhat more detail on shareholding, see this article by Wang Jiangyu.
In other words, only about one-third of the market actually trades (as “geren gu”) over the various exchanges. Professor Stephen Green:
"The large proportion of non-tradable equity means that China’s liquid stock market is relatively small, worth just RMB 1,317.9 bn (USD 158.8 bn), less than 17% of GDP, at the end of 2003. This is small in comparison to other markets, even other emerging markets. The markets of Indonesia, Malaysia and Thailand were all more developed, with only the likes of Argentina and Poland behind."
For elaboration, see his report here.
More on China investment in our next posting.
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