Reshaping the Chinese Stock Market to Accommodate Red-chips: Practice, Balance and Consequence
In the Chinese stock market parlance, red-chips refer to Chinese companies that are incorporated overseas but have their main business operation in China, regardless of whether they are listed or not. Red-chips include Chinese state-owned enterprises, but this thesis focuses on those that are not state-owned. The reason for concentrating on privately-controlled red-chips is that Chinese authorities can decide the listing venue of state-owned red-chips, and thus, accommodating state-owned red-chips is not a policy priority of the recent Chinese stock market reforms. For terminological brevity, red-chips referred to in this thesis mean the privately-controlled sub-set unless otherwise specified. Red-chips usually have a big business scale and large market share with the ability to develop technologies and boost innovations, which are of significance to economic development. Reshaping the stock market to accommodate red-chips is thus a crucial goal behind China’s recent policy and regulatory changes. However, satisfying issuers’ preferences to promote stock market development has to go hand-in-hand with effective protection of investors, the suppliers of capital. Therefore, ‘how did China seek to reshape the stock market to accommodate privately-controlled red-chips while protecting investors?’ is a key underlying concern across the package of China’s recent stock market reforms. To answer this question, this thesis examines several policy and regulatory changes that aim at accommodating red-chips while not compromising investor protection, looking into their functioning and interconnection, exploring the market impact and seeking policy implications. It argues, mainly on the basis of doctrinal, comparative and empirical analyses, that Chinese authorities have adopted stringent restrictions on the issuer side to seek a trade-off between accommodating red-chips and safeguarding investors, which may have nevertheless discouraged or deterred certain red-chips from going public domestically. It further argues that the Chinese stock market regulatory policy is yet to achieve a balance between ex-ante and ex-post regulation, although the Chinese-style securities class action mechanism may provide a basis for some reorientation away from ex-ante regulation towards further market openness to attract red-chips. At a broader level, this thesis argues that the aim of better accommodating red-chips will be built considerably upon establishing a Sino-Hong Kong common stock market in the long run. This thesis is structured as follows: The introductory chapter addresses the research context, identifies the research question, figures out the research scope and limitations, canvasses the research contributions, and outlines the methodology. Chapters Two to Five each discusses a reform that aims to accommodate red-chips in the Chinese stock market with the use of ex-ante regulatory measures to ensure investor protection, namely the implementation of the registration-based system, the removal of the taboo of domestic listings with a dual-class share structure and/or a variable interest entity structure, and the introduction of depositary receipts as a trading instrument. Chapter Six examines the creation of the Chinese-style securities class action mechanism to safeguard investors on an ex-post basis. Chapter Seven discusses the furtherance of the Chinese stock market reforms to accommodate red-chips from the perspective of Sino-Hong Kong market cooperation. Chapter Eight concludes.
Chinese stock market, Investor protection, Market openness, Red-chips
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