The Split-Share-Structure Reform in China: Past, Procedure, and Impact

Abstract

This study aims to introduce and investigate the different aspects and influences of the split-share-structure reform (SSSR) of China’s stock market so as to draw a complete picture of this important event in contemporary China, the largest transition economy in the world. Before the SSSR in 2005, there were two types of shares, namely tradable shares and non-tradable shares, which were a unique characteristic of Chinas stock markets. Tradable and non-tradable shares had different holding costs and were distinguishable by whether they can be traded, but both types had the same dividend rights and voting rights. The split-share-structure (SSS) existed during the transition of China’s economy from a regulation-oriented economy into a market-oriented economy.The government gained financing through the privatization of state-owned enterprises (SOEs) but aimed to maintain controlling rights over SOEs by introducing non-tradable shares. However, this approach caused problems for listed SOEs in terms of the evaluation of firm value, liquidity, agency problems, and other issues, which impeded the development of China’s stock market to some extent. Under SSS, non-tradable shares accounted for more than two-thirds of the stock market, and the holders of such shares were insensitive to fluctuations in stock prices, which resulted in disparate interests between shareholders of non-tradable and tradable shares, resulting in tenuous corporate governance structures and poor corporate performance.