Privatization through an Overseas Listing: Evidence from China's H-Share Firms

Article excerpt

We study the partial privatization of 53 Chinese state-owned enterprises (by their listings on the Hong Kong Exchange over the period July 1993 to December 2002. We find that listing has led to a median increase of 70% in real net profits, 80% in real sales, 50% in capital spending, and a mild but nonsignificant improvement in coverage ratios, but no improvement in return on sales and a significant underperformance of returns against several market index benchmarks. Further investigation shows that firm performance is negatively related to state ownership, but positively related to legal-personal ownership and foreign ownership.

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Ever since Margaret Thatcher's government implemented a program of privatization in the United Kingdom in the late 1970s, the privatization of state-owned enterprises (SOEs) has become a significant economic phenomenon that has attracted a great deal of interest from academics. Although there are many studies on western SOEs, this is not the case for China, where a large-scale privatization program was only examined recently by Sun and Tong (2003). Using a sample of 634 SOEs in China that went through share issue privatization (SIP) in 19941998, they found limited success in the privatization program. They argued that selling too few government shares to private owners means that the governing structure of the partially privatized SOEs cannot undergo fundamental changes. Boubakri, Cosset, and Guedhami (2002) examined 201 cases of privatization in 32 developing countries and found that the relinquishment of control by the government is one key determinant of changes to profitability. If the control on privatized SOEs is not contestable, which is the case in China, Sun and Tong's (2003) findings may not be too surprising after all. However, given the fact that privatization is typically sequential, whereby governments sell their shares bit by bit, it may not be that critical to shift controlling shares to private hands to obtain improvements in the performance of privatized SOEs.

Indeed, the Singapore government still maintains controlling power over privatized SOEs (called government-linked corporations) but these firms seem to operate quite efficiently, according to a study by Feng, Sun, and Tong (2004). Another recent paper by Gupta (2005) showed that in India, the government privatized only a very small portion of the equity in SOEs, but the operating performance of such firms still improved significantly after privatization. Gupta argued that this was because India has a well-established stock market that long predates privatization. Boubakri et al. (2002) also found more improvements in efficiency and output for firms in countries where stock markets are more developed and where property rights are better protected and enforced. Economic growth and foreign ownership were found to be other key determinants.

In this article, we examine 53 Chinese state-owned enterprises (SOEs) that were partially privatized through SIP in a well-established foreign market, the Stock Exchange of Hong Kong (SEHK) during 1993-2002 by listing a relatively small amount of "H-shares." (1) If foreign (i.e., non-Chinese) ownership and a sophisticated stock market are important to the degree to which privatization succeeds, then Chinese SOEs that have privatized by issuing shares in Hong Kong should show significant performance improvements after privatizing.

However, Chinese SOEs that listed in Hong Kong went through a process that was not necessarily based on the economic merits of the firms, especially in the early days. There were stories circulated about favoritism and the misuse of funds raised by the listed firms. In fact, H-shares are issued at discount relative to the local shares. Hence, we wish to see if China's privatization program, as a whole, can leverage on the Hong Kong market to improve the SOE performance. Our study provides evidence on this.

Since the Hong Kong stock market houses most of China's overseas listings, our study also has a direct bearing on the effectiveness of this foreign-listing strategy as a way to vitalize SOEs. …