1. The helping hand, the dead hand or the grabbing hand? Government shareholders in publicly listed firms in China Yan-Leung Cheung City University of Hong Kong Lihua Jing City University of Hong Kong P. Raghavendra Rau Purdue University Aris Stouraitis City University of Hong Kong

2. Example I  “Hong Kong Exchanges and Clearing (HKEx) is investigating a China Shipping Development (CSD) connected transaction involving its state- owned parent, the China Shipping Group … ”  “The CSD disclosure detailed a six-part charter agreement with its parent valued at HK$171 million... Two of the six deals worked in the listed company's favour. But the independent assessments [by leading Asian and European shipbrokers] found the aggregate net benefit to the controlling shareholder to be about 338.77 million yuan [HK$337 million].”  South China Morning Post, 1 March 2004

3. Example II  Zhu Kuan (commercial arm of the city of Zhuhai), borrowed more than US$750 million from lenders such as Standard Chartered, Morgan Stanley, Lehman Brothers and others. In 1998, the group started defaulting on some loans, and in 2001 negotiations for a workout began.  “This summer, the outraged creditors discovered that the Zhuhai government had transferred land worth $125 million out of Zhu Kuan’s control and back into the hands of the city – land the creditors assumed would be theirs to sell.”  BusinessWeek, 1 December 2003

4. What is expropriation (tunneling)?  In companies with concentrated ownership, controlling shareholders can expropriate wealth from minority shareholders in many ways:  They can extract cash by selling assets, goods, or services to the company through self-dealing transactions.  They can obtain loans on preferential terms.  They can transfer assets from the listed company to other companies under their control.  They can dilute the interests of minority shareholders by acquiring additional shares at a preferential price.

5. Basic summary I  We analyze 182 related party transactions filings between Chinese publicly listed firms and their state-owned enterprise (SOEs) shareholders during 2001-2002.  We show how resources are tunneled from minority shareholders of the firm to the state.  The expropriation is concentrated in firms with the highest state ownership and controlled by local government SOEs.  The median value loss for these firms represents 45% of the value of the connected transaction, suggesting that our results are economically significant.  Our results are more consistent with the direct tunneling of resources away from minority shareholders than with the poor performance of state-owned firms.

6. Basic summary II  We find that the expropriation is concentrated in provinces where local government bureaucrats are less likely to be prosecuted for misappropriation of state funds.  The social role argument suggests a transfer of resources to the local governments of under-performing regions (provinces with large budget deficits and high unemployment), but we show that most of the expropriation is concentrated in China’s richest provinces.

7. Conclusions  Our evidence adds new dimension to previous international studies which show that firms benefit from political connections.  Overall, our evidence is most consistent with tunneling and with the “grabbing hand” model of government (Frye and Shleifer, 1997; Shleifer and Vishny, 1998)