Segmentation of the Chinese stock market: A review

Abstract

The Chinese stock market has a threefold segmented structure. Firstly, there is a division between floatable and nonfloatable shares, known as the split-share structure. Before 2005, more than two-thirds of the shares outstanding were nonfloatable. This structure limited shareholders’ ability to exercise governance rights through stock trading. While largely dismantled by the 2005 reform, the split-share structure has not been fully eliminated. Secondly, floatable shares can be issued in multiple currencies. However, shares denominated in the domestic currency often trade at a premium over those denominated in foreign currencies. This premium can be explained by the differences in target investors and the trading restrictions. Thirdly, stocks denominated in the domestic currency are sorted into different market tiers depending on the firms’ profitability and market capitalization. The limited mobility of stocks across different tiers engenders tier-specific characteristics, such as high family ownership and venture-capital backing, which have not been sufficiently studied. In this paper, we delineate the three aspects of market segmentation, offer critical comments on the caveats of the extant studies, and propose topics for future research.