The Chinese stock market started in 1990 with the establishment of two domestic stock exchanges (the “A share” market): the Shanghai Stock Exchange (SSE hereafter) and the Shenzhen Stock Exchange (SZSE). The number of listed firms has been growing since then, with more than 5,000 firms now listed in the two exchanges and the newly established Beijing Stock Exchange. The A share market is the second largest in the world in terms of total market capitalization, trailing only the US equity markets. Due to stringent listing requirements in the domestic market, among other reasons, a large number of Chinese firms are listed externally, mostly in the Hong Kong exchange (HKEX), which follows regulations similar to those in the US and is open to global investors. The second most popular external IPO destination for Chinese firms is the US.
During the period of 2000-2018, the Chinese economy grew by a factor of 4.8 in real terms, much faster than the rest of the large economies, including India, Brazil, Japan and the US. Firm-level, cross-country regressions indicate that A share firms underperform a large set of listed firms from both developed and developing countries by 15.0% per year, while externally listed Chinese firms’ performance is on par or better than the same set of listed firms from other countries. In terms of cumulative, ‘buy and hold’ returns, the performance of the A share market is the worst among the group of large countries (see Figure 1). The cumulative returns of the A share market are lower than those of five-year bank deposits or three- and five-year government bonds in China, and investors in the domestic stock market earned essentially zero net return in real terms.
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