Introducing Demutualization and Listing as a Mean to Improve the Management of Chinese Stock Exchanges

22 Pages Posted: 26 Oct 2006

See all articles by Kwek Ping Yong

Kwek Ping Yong

University of Pennsylvania - The Wharton School

Kelvin Fu


Date Written: October 2006


China is attracting a lot of attention from the rest of the world for a very good reason. There is much talk all around, discussing about the potential of this far eastern dragon, the likely impacts she will have on the world economy. Undeniably, China is the fastest growing economy on the planet, achieving more than 7 percent GDP growth since 1991. It seems like there is no stopping this giant. But if the picture is all so rosy, what is causing the reluctance of institutional investors from pouring their money into the Chinese exchanges? What are the factors that are constraining China's growth? And how will the solutions to these problems bring about greater benefits for the people in China and the rest of the world?

The fundamental problem with the exchanges lies with the issue of corporate governance. There are tons of negative publicity about insider trading, related party transaction and asset stripping by listed companies in the Chinese media, which has greatly impacted investors' confidence. Moreover the existence of non-tradable shares, accounting for more than 60% of all the shares issued on the exchanges has been the greatest impediment to the development of China's equity market. Traditionally, owners of non-tradable shares do not have a chance to realize the value of their shares in the market. As a result, many will abuse their executive power and participate in activities or awarding contracts that will lead to their personal monetary gains.

Currently the authorities are involved in a series of shares reforms to rectify the situation. The process of share reforms will indeed bring about improvements to the existing split share structure of most listed companies. However to fully alleviate the lack of corporate governance in the exchanges, implementing the split share reform is not an adequate measure, because the exchanges will still lack the motivation to closely monitor the listed companies. Hence we propose that the two stock exchanges, after going through a successful reform, to go for demutualization follow by listing on the Hong Kong Stock Exchange.

The listing act will not only bring about better corporate governance to the Chinese exchanges thereby increasing foreign investors' confidence, it will also fuel the growth of other local financial institutions, entice the public to take out their savings to invest, the exchanges can have more money to invest in high-tech infrastructure, improve service quality of investor relations and more incentive for the Chinese government to lift the capital control etc. The benefits are plentiful but most importantly it will create a more even distribution of income, thereby relieving the poverty pressure and increase the living standards of the majority of Chinese citizens.

To evaluate the benefits that a possible demutualization and listing of the Chinese stock exchanges will be the main angle in this paper. It will also seek to give a future outlook of what can be expected after the demutualization and listing take place, and how it will impact the world economy as a whole and the benefits which it will bring for the Chinese communities. Maybe till then, we can see the dragon of the Far East unleash the fullest potential and establishing itself as the economic power house of the world.

Keywords: China, Stock, Exchange, Demutualization, Listing, corporate governance

JEL Classification: G18

Suggested Citation

Yong, Kwek Ping and Fu, Kelvin, Introducing Demutualization and Listing as a Mean to Improve the Management of Chinese Stock Exchanges (October 2006). Available at SSRN: or

Kwek Ping Yong (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Kelvin Fu

Inventis ( email )


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