Dissecting the Long-term Performance of the Chinese Stock Market

Abstract

The Chinese economy, the largest in the world in PPP terms, has been the fastest growing for the past forty years, and the size of the Chinese stock market is the second largest in the world. During the period 2000-2014, China’s domestic listed firms underperform listed firms from developed and emerging countries. Chinese externally listed firms, especially those listed in Hong Kong, and matched unlisted firms perform much better. We examine institutional features of the Chinese markets as the explanation for these differences. Problematic IPO and delisting processes exacerbate the adverse selection of firms in the market. With much higher levels of investment compared to listed firms from the US, Japan, India and Brazil, Chinese firms generate lower net cash flows, implying low investment efficiency. Lower cash flows are associated with more related-party transactions. Both of these results indicate deficiencies in corporate governance.

Keywords: Stock market, return, IPO, investment, cash flow, related party transaction

JEL Classification: G12, G15, G3