3. OWNERSHIP, DIVERSIFICATION AND FIRM PERFORMANCE IN EMERGINE ECONOMIES AND CHINA 28
3.1.2 The Emergence of Stock Markets in China 37
The economic system in China was highly centralized before 1978 when the central government launched its Open Policy. Under the leadership of Deng Xiaoping, the central government initiated large-scale economic reforms in 1978 (Qian, 1999). The reforms were aimed at moving the economy toward a greater decentralization of decision- making and an increased reliance on market forces.
The development of China’s stock market is one of the most important elements of China’s reform of its fina ncial system. In 1981, the central government began to issue treasury bonds to finance deficits. In 1986, the Shanghai branch of the People’s Bank of China set up the first over-the-counter (OTC) market in Shanghai. In 1987, Shenzhen Development Bank sold the first stock in Shenzhen market.
In December 1990 and July 1991, the Shanghai Stock Exchange (SHSE) and the Shenzhen Stock Exchange (SZSE) were established in China. By the end of 1991, 14 companies were listed in the two stock exchanges. Since the stock exchanges were established, China’s stock markets have developed quite rapidly. Compared to the 14 listed companies (8 on Shanghai Stock Exchange and 6 on Shenzhen Stock Exchange)
in 1991, 1287 companies (508 on SZSE and 779 on SHSE) had been listed on the two Stock Exchanges by the end of 2002.
The fast development of China’s stock market serves as a window through which one can view the outcomes of economic reforms in the country and it provides scholars with a view on how to study China’s emerging economy. On the one hand, the number of listed companies and raised capital has increased rapidly since the establishment of the two stock markets in 1990, which is a sign to show that China’s economy is under fast development and increasing numbers of corporations are transiting into an advanced and modern form of firms. On the other hand, together with this transition, the potential problems that have been found in the West such as agency problems characterized by the separation of ownership and control have the potential to show more of its face in the economic activities in China. To study this dynamic phenomenon, scholars have been working on understanding China’s economy and its companies, which has also helped to enrich the classical theories about firms such as agency theory and transaction cost theory. Finally, it has enhanced people’s understanding on economic transition in emerging economies and China (Tan, 1996; Xu & Wang, 1997; Tian, 2002; Sun et al., 2002).
3.1.3 The Ownership Structure of China’s Listed Companies
A company in China may issue five different types of shares on either the Shanghai or Shenzhen Stock Exchanges: state shares, legal person shares, employee shares, A- shares and B-shares. In addition, they may issue shares in Hong Kong and on
overseas exchanges. All shares of a listed company have the same voting rights and cash- flow rights, which means that one share is entitled to one vote. There is no cross- listing between the two exchanges (Xu & Wang, 1997).
State shares are those held by the central government, local governments, or solely government-owned enterprises. The central and local government has the right to appoint the government officials as agency to exercise ownership rights on the state- controlled firms. For most listed companies, the State is the largest shareholder.
The legal person shares are shares owned by domestic institutions. There are various forms of legal person shareholders such as stock companies, non-bank financial institutions, and SOEs that have at least one non-state owner. Like State shares, legal person shares are not allowed to be circulated publicly or traded to either domestic or foreign individual investors. However, under the approval of the China Securities Regulatory Commission (CSRC), legal person shares can be transferred to domestic corporations.
Tradable A shares are owned by Chinese domestic individual residents or legal persons, but are not allowed to be owned by foreign investors. A-shares are the only type of tradable shares that can be publicly traded among domestic investors on SHSE and SZSE. Individuals are only allowed to hold no more than 0.5% of the total shares of any listed company. The CSRC requires that A-shares account for more
than 25% of total outstanding shares for a company when listed. The market price of a listed company refers to the price of A-shares (Xu & Wang, 1999).
The employee shares and management shares are offered to workers and managers of a listed company, usually at a substantial discount. The employee shares only account for limited part of the total shareholdings of listed companies. Managers are not allowed to trade their shares on stock markets during their tenure.
Initially B-shares are available exclusively to foreign investors and some authorized domestic securities firms. In 2001 the CSRS began to allow the domestic individuals to invest in B-Share. The B-share market is separated from the A-share market, with SHSE B-shares denominated in US dollar and SZSE B-shares in Hong Kong dollar.
H-shares are issued and traded at the Hong Kong Stock Exchange. At the SHSE, 56 companies have offered B-share or a combination of the three foreign shares, and 34 at the SZSE in 2002.
A typically listed company in China stock markets (SHSE or SZSE) has a mixed ownership. Table 3-1 presents an overview of the percentages of the total shares in each of the different share classes across Chinese firms across 1993 to 2002. The table shows that the state, legal persons and domestic individual shares are the three predominant groups of shareholders. Each of the three holds about 30% of the total outstanding shares (Shanghai Securities Yearbook, 1993-2002).
The ownership structure of Chinese listed companies discussed above has led scholars to put an intense research focus on the three major types of shareholdings:
State shareholding, Legal Person shareholding and Private shareholding (Tan, 1996;
Xu & Wang, 1997; Tian, 2002; Sun et al., 2002). In addition, there are also some literatures that study other types of ownership such as town and village ownership (Jefferson et al, 1992). In this work about shareholdings in China, there are two basic streams: one stream to study the effect of ownership concentration, and the other stream to study the effect of divergent ownership identities. I will discuss the details of these two streams, below.