The Privatization Two-Step at China’s Listed Firms by

During the 1990s, China’s stock market was subordinated to industrial policy and as a result it did not facilitate privatisation. 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 privatisation on firm performance. 2Introduction During the 1990s, China’s stock market was subordinated to industrial policy and as a result it did not facilitate the privatisation of listed firms.1 Instead, it supplied capital to those state-owned enterprises (SOEs) that restructured into shareholding companies and listed. Some 1,200 ‘one-third privatised ’ state firms received approximately Rmb1,042.6bn ($125.6bn) i