From Non-Tradable to Tradable Shares: Split Share Structure Reform of China's Listed Companies

Abstract

Prior to China's split share structure reform, domestic A shares were divided into tradable and non-tradable shares. There were two main reasons for the existence of non-tradable shares. First, the main aim of setting up the stock market was to enable state-owned enterprises to raise capital. Secondly, the government wanted to retain control of these enterprises. The existence of non-tradable shares has been regarded as the biggest impediment to the development of China's equity market and has caused the government a headache for many years. There was a previous attempt in 2001 to release these non-tradable shares onto the market but it ended in failure as the stock market reacted negatively to the prospect of a huge increase in the supply of shares. The government has learnt some lessons from its past failure. The government had prepared the ground for support of the market through its Qualified Foreign Institutional Investor Scheme and Administrative Measure for Strategic Investment in Listed Companies by Foreign Investors. Under the reform, non-tradable shareholders negotiated a compensation plan with tradable shareholders in order to make their shares tradable. Protection of the interests of tradable shareholders was essential to shore up investor confidence. While the reform appears to have been carried out successfully, it raises several issues of concern: first, the extent to which individual retail investors are truly protected by giving them a say on whether the compensation package is accepted and implemented; secondly, the absence of a legal basis to justify discriminating against B shareholders by denying them the right to vote on the compensation package and to receive compensation from non-tradable shareholders; and third, without a sound theoretical basis for explaining state enterprise property rights, conversion of non-tradable shares to tradable shares will not help to resolve past ambiguity over ownership of state assets under the control of these companies.