Avoiding China's Capital Market: Evidence from Hong Kong-Listed Red-Chips and P-Chips

The purpose of this paper is to explore the puzzle of why so many Chinese firms eschew listings in China. Hundreds of firms founded in China have reorganized themselves as overseas corporations and listed on the Hong Kong Stock Exchange. These firms are called Red-chips if they are state-owned enterprises (SOEs) and P-chips if they are not state-owned (non-SOEs). To examine the rationale behind the listing decisions of P-chips and Red-chips, we compare the characteristics of Red-chips (P-chips) with SOEs (non-SOEs) listed on China stock exchanges. We find that SOEs are more likely to list in China. Moreover, while we do not observe any significant difference between the performance of Hong Kong-listed and mainland-listed SOEs, we find non-SOEs that are listed in Hong Kong are significantly more profitable than those listed in China. We then explore three possible explanations for why Chinese firms, especially non-SOEs, may prefer to be listed in Hong Kong: (1) to facilitate personal wealth transfers out of China, (2) to increase access to debt capital, and (3) to facilitate more efficient stock price formation. We find that all three of these explanations have statistical support.