Introduction: The Imperative of Research into the Chinese Firms' Cross-Listing

1.1 Research Background

China, the most populous country in the world, and one of the four oldest known civilizations, with a written history of more than 4,000 years, finally opened its doors to the outside world in 1979. The nation has since undergone tremendous changes. In addition to profound political and social transformations, the economic regime in China has been gradually converting from a centrally planned to a market-based economic system. One of the most important and significant aspects of these economic transformations and reforms is the re-establishment of the stock markets in Shenzhen and Shanghai in the early 1990s. This has been followed by an established and gradually improved legal framework for governing the activities of the stock markets and financial markets. Lucrative opportunities unleashed by these developments together with continuous rapid growth of the Chinese economy have attracted considerable attention from academic researchers, industry practitioners, and policymakers to China’s stock markets¹.

Among all the transition economies around the world, China has followed a rather unique method to transform its Soviet-style centrally planned economy to a more market-oriented economy, within the constraints of an almost unchanged political system. This system has been termed ‘Socialism with Chinese Characteristics’ and can be viewed as one type of mixed economic system. Therefore, economic transformation has been taking place without political democratization and without large-scale privatization. Liberalization has proceeded incrementally and privatization was delayed until two decades after the initiation of the reforms. Yet to date, the country has achieved a high and stable economic growth rate. Over the past three decade, China’s economy has enjoyed average annual growth rates in excess of 8 percent. The economy recorded an annual growth rate of 7.5 percent during the period of the 11th Five-Year Plan (2006–2010). The ‘once-in-a-century’ global financial meltdown that occurred in the latter half of 2008 seemly hit China’s economy hard, especially in the export sector, which was badly affected with a significant slide in economic growth and a fall in earnings of listed companies. It is fair to say that given the small size of overseas investments by China’s enterprises and securities institutions, the global financial meltdown had a rather limited direct impact on China’s securities markets (China Securities Regulatory Commission (CSRC) Annual Report, 2008). However, the on-going European debt crisis is slowing down global economic recovery, and Chinese companies face increased difficulties and uncertainties. Under these circumstances, the Chinese government is still determining to push ahead the reforms and keep opening up China’s capital market, in order to allocate resources and serve the real economy and social development in a sound manner.

Since its formation in 1990, the Chinese stock market has enjoyed rapid growth with the incremental development of China’s market economy. By the end of 2011, there were 2,342 companies listed on the Shanghai Stock Exchange and the Shenzhen Stock Exchange, with combined capitalization reaching RMB 21.48 trillion. Combined free-float capitalization reached RMB 16.49 trillion, although down 19.09 percent and 14.06 percent from the end of 2010 respectively (CSRC Annual Report, 2011). The overall market capitalization represents 45.55 percent of China’s Gross Domestic Production (GDP), ranking China the world’s third largest stock market after the United States (US) and Japan² in terms of combined market capitalization. The Shanghai Stock Exchange was ranked the sixth biggest stock exchange in the world by market capitalization in 2011 (World Federal of Exchanges, 2011), and all of this remarkable performance has been achieved under relatively poor legal and financial systems.