Avoiding China's Capital Market: Evidence from Hong Kong-Listed Red-Chips and P-Chips

Abstract

There is a long line of Chinese firms waiting for government approval to list on mainland Chinese or international stock exchanges. There are also hundreds of Chinese firms that have not received government listing approval, but have reorganized themselves as overseas corporations, followed by listing on the Hong Kong Stock Exchange. These overseas corporations with mainland Chinese operations and Hong Kong listings are called if they are state-owned entities (SOEs) and if they are not SOEs. We use a comprehensive sample of Chinese firms listed in mainland China and in Hong Kong to test whether Red-chips and P-chips are (a) more likely to be firms the Chinese government does not want on mainland exchanges (because they are neither the largest and most profitable Chinese firms nor the most politically connected), or (b) likely to be firms that eschew Chinese exchanges in favor of the Hong Kong capital market (because of the immediacy of the approval process in Hong Kong or for more efficient pricing in a better-behaved market). We find that more politically connected SOEs are listed on Chinese stock exchanges, and that larger and more profitable non-SOEs are listed in Hong Kong as P-chips, for the overwhelming majority of which we can find no evidence that they ever applied for government approval to IPO. We conclude that the largest and most profitable Chinese firms that are unconstrained by their relationships with central and provincial government prefer to be listed in the Hong Kong capital market.