China had robust stock markets in the 1930s, but they all closed down after the revolution in 1949.
Companies began to raise capital in the 1990s as China opened up and the economy transformed from a centrally-planned, state-controlled economy, to one based more on market principles.
One of the things that happened right away was the stock exchanges opened. In Shanghai, the exchange re-opened, and a new stock exchange opened up in Shenzhen for Chinese companies.
They were used primarily to allow Chinese companies that were state-controlled to reform, move into corporate ownership and introduce outside shareholders - and they were very popular with the Chinese people.
But there wasn’t much capital in China to raise. Many of the state-owned enterprises needed to raise a lot more capital, so they started looking at going outside.
The first place that companies went to list was Hong Kong. It had a well-developed stock market, English language and English Common Law, so it was a viewed as a good place for China to step out.
The companies that chose to list in China issued what were called H-shares. These were the shares listed in Hong Kong of a Mainland company that’s state-controlled. Initially they were all state-controlled, but no longer are they all state-controlled.
If a Mainland company issues the actual shares of a Chinese company on the Hong Kong exchange it’s called an H-share.
Later, another type of stock developed for the Hong Kong market: red chips.
These are companies that have all of their assets in China, they’re state-controlled, and they set up an offshore holding company - usually in the Cayman Islands or British Virgin Islands - and that holding company lists in Hong Kong, yet all of the assets are located on the Mainland.
Red chips were done in part for tax reasons. That’s because foreign-invested enterprises paid tax at a lower rate than domestic Chinese companies so they got a big tax break for doing it.
There are about 100 red chips and 100 H-shares currently listed on the Hong Kong Stock Exchange.
Then there was another type of company that emerged as China opened up: the private company, which doesn’t have any state ownership.
Those companies found it difficult to list on the Chinese stock exchanges. The stock exchanges have now become more open to it, for example an SME board opened on the Shenzhen Stock Exchange in 2005.
Then in 2009, the ChiNext, China’s answer to Nasdaq, opened up. That’s now the place where entrepreneurial Chinese companies go to the stock market.
But those markets are small.
Many private Chinese companies that need to raise capital have chosen to list offshore. Some go to Hong Kong and list what are sometimes called P-chips, or private companies.
But most of them go to the United States. They set up offshore holding companies, usually in the Cayman Islands, and then list shares on the Nasdaq or New York Stock Exchange.
There are a couple of hundred Chinese companies that have done listings in that way.
Some of the biggest private Chinese companies are listed on the New York Stock Exchange or Nasdaq, companies like Baidu, Sina or Sohu.
The other big private companies, like Tencent, have listed in Hong Kong.
Alibaba had a fight trying to list on the Hong Kong Stock Exchange, but Hong Kong would not allow them to have the type of control structure they wanted to have, so they listed instead in the United States.