The Privatization Two-Step at China's Listed Firms

During the 1990s, China’s stock market was subordinated to industrial policy and as a result it did not facilitate privatization. The majority of listed companies’ shares were non-tradable and held by state organs. However, since 1997 an off-exchange market in these non-tradable shares has developed. State entities are deciding, in ever-greater numbers, to sell their holdings to private investors, and control rights over the firms involved often change as a result. This market is facilitating corporate restructuring which should lead to improved firm performance. China’s capital market will only mature if this occurs. This paper provides an analysis of the non-tradable share market and reviews evidence on the impact of privatization on firm performance.