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ed SOE were to be freely traded. As a concession, the ownership of eachenterprise was split into (1) state share; (2) legal persons shares and (3) common domestic
A-shares. After the opening of two stock exchanges in the beginning of 1990s, with only asmall fraction of A-shares are tradable, the state keeps on holding the controlling sharestakes. This is different from both advanced and other transition economies, explains largepart of the inefficiency of corporate governance of China listed companies. This specialinstitutional arrangement rooted deeply in China political system and ideology, as well asin the economic reform strategy.
After a description of the corporate governance and shareholding structure of Chinalisted companies in Section 2; an in-depth historical and institutional analysis of theformation of state-owned share given in Section 3; Section 4 then reviews an important
reform attempt of 2001, through which the government tried to resell its illiquid sharesgradually. The reform arose dramatic market turbulence, lasting for less than half a yearand then called off, because the government’s objective, aiming to finance its huge social
security fund gap, conflicts with that of market; Section 5 makes some concluding remarks.
2. Corporate governance and share structure
2.1. The role of PLCs in Chinese economy
Over the past decade or so, China SOEs underwent significant reforms, about 80% of all
small and medium-sized enterprises have been sold to employees and outside investors,
more than 1200 large enterprises restructured into PLCs. Meanwhile, stock market had
been introduced and growing rapidly, expected to play an important role in reshaping China
traditional bank-dominated financial system. By the end of 2002, total market capitalization
of PLCs reached 4100 billion RMB, about 40% of China’s GDP. The output of PLCs
amounted about 18% share of China GDP, and distributed in a variety of key industries in
772 Q. Qiang / Journal of Asian Economics 14 (2003) 771–783
the whole economy. The restructuring of SOEs to PLCs has demonstrated as a ‘‘model’’ for
the overall reforming SOEs. However, the performance measured by earnings-related
indicators of PLCs have been continuously falling throughout many years. For example,
PLCs’ profit per share dropped from 0.35 RMB in 1993 to 0.20 RMB in 2000, the average
annual declining rate is 7.7% (Table 1).
Why did China PLCs perform so poorly? It is hard to be attributed to macroeconomic
factors, since during the same period, the yearly growth rate of China GDP is about 8%, and
the other kind of enterprises, such as township and village enterprises and foreign invested
enterprises performed quite well.1 Hu et al. (2003) provides another explanation arguing
that most of the PLCs are in the so-called declining industries, such as primary and
secondary industries, but considering of the current development stage of China, such
explanation also not hold. On the other hand, it is impossible to explain why the
performance of PLCs is worsening so rapidly and continually, while the general industry
composite of PLCs remains stable.
It should also be noted that in China, in fact, only a clean and perhaps better performed
group of SOEs could be chosen to be listed on the two exchanges. So, the most plausible
explanation about the poor performance of China PLCs lies largely in themselves
intrinsically, espe