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1 BACKGROUND As mentioned, for political, economic, and ideological reasons, ‘privatization’ (siyouhua) has been taboo in China. But de facto privatization has been underway since the mid-1980s, under the name of ‘shareholding system reform’ (gufenzhi gaige). Under this reform, various types of shares have emerged, including state shares (guojia gu), legal-person shares (faren gu), individual shares (geren gu), and foreign shares (waizi gu), defined according to the type of owner (see Table 7.1). Initially, only individual shares and foreign shares could be traded on the Shanghai and Shenzhen Stock Exchanges. As a safeguard against loss of state control over enterprises, state shares were made nontradable and legal-person shares could only be transferred among ‘legal-persons’ (that is, enterprises or institutions) (Walter and Howie, 2003, pp. 80–81). Since most legal-persons are actually state entities, legal-person shares and state shares are collectively known as state-owned shares (guoyougu). The nontradability of state-owned shares led to many problems. First, state assets were made ‘dead’ (that is, obsolete) and thus less valuable. Second, property rights of enterprises could Table 7.1 Types of Chinese shares Official holders Type of share State-owned shares, of which: State shares Legal-person shares Individual shares Foreign shares Source: State Council authorized representatives Enterprises, institutions, or authorized social groups Public retail investors, or employees of the companies that issue the shares Foreign investors Based on Walter and Howie, 2003, p. 77. 124 Completing privatization through ‘share conversion’ 125 not be clearly defined among individual investors. Third, capital mobility and economic restructuring were...