An alternative to privatization: the listing of H‐shares in Hong Kong

Details how, in a bid to invigorate its state‐owned enterprises, the Chinese government allows some of its large state‐owned enterprises to list on the stock exchanges of Hong Kong and New York. Reports that, although at the beginning the stocks were very well received, the H‐share prices started to experience a free fall when the companies reported poor earning results in the summer of 1995. Looks at several arguments which have been put forward to explain this drastic change, but observes that most of these theories miss one important dimension, namely, the institutional factor. By using this particular point of view, argues that the H‐shares are poorly designed, noting, in particular, that the concerns for agency cost and asymmetric information problems have not been dealt with properly. Analyses the institutional problems of the H‐share companies and, based on this analysis, outlines some preliminary recommendations on how the H‐share companies can be reformed.