Dissecting the Long-Term Performance of the Chinese Stock Market

Abstract

The Chinese economy, the largest in the world in PPP terms, has been the fastest growing for the past three decades, and the size of the Chinese stock market is the second largest in the world. Listed firms that contribute to the growth ‘miracle’ and have exceeded expectations should deliver superior long-run returns to investors. During the period 2000-2014, we find that China’s domestic market and its listed firms underperform markets and listed firms from developed and emerging countries, and matched unlisted firms. Chinese firms listed overseas, especially those listed in Hong Kong, perform much better. We examine reasons for the disconnection between economic growth and stock market performance. Problematic IPO and delisting processes exacerbate the adverse selection of firms in the market. With much higher levels of investment compared to listed firms from the US, Japan, India and Brazil, Chinese firms generate lower net cash flows, implying low investment efficiency. Lower cash flows are associated with more related-party transactions, indicating deficiencies in corporate governance.