Most of the 1,000 or so companies listed in China are state-owned. Typically, these companies sell a minority stake to the public, leaving most of the equity, and effective control, in government hands. About two-thirds of listed Chinese companies’ value is locked up as nontradable state-held equity, analysts estimate.
“China’s domestic stock markets aren’t at all pure markets,” said Ai Qunce, chief executive of International Credit, a Chinese investment company. “The government has used them to park many badly performing state-owned companies, and so there’s always been a fundamental distortion between China’s economic performance and the performance of the stock market.”
The merging of market investment with state control has often failed to improve the companies’ performance, while state-appointed managers’ access to investor capital has led to widespread corruption that has battered market confidence, Mr. He said. “Violations in the marketplace simply aren’t monitored and swiftly punished,” he said.
But analysts said that China faced a difficult situation: on the one hand, it needs to sell its holdings to raise cash for its social welfare and pension programs; on the other, the government fears inundating the country’s stock markets with huge amounts of equity at a time the exchanges are already struggling. A previous effort to unload state holdings, in 2001, was abandoned after stock prices fell by a third.
But the transfer of state assets to openly traded markets will ultimately discourage the pillaging of state-owned companies and the manipulating of stock prices, said Ivan Chung, managing director of Xinhua Finance, a credit rating company that monitors listed companies.
“It’s a step forward for privatization and will inject more transparency,” he said. “Shareholders will be able to have more confidence in management.”