One of the major difficulties blocking China’s path to becoming a developed capital market is the “state share overhang” problem that hampers the development of the stock market. With almost two-thirds of the outstanding shares of the stock market owned by the central government, investors are wary of the potential sell-off by the government that would inevitably dilute the value of their stock holdings. In this paper, we review the state share reform that aims at solving the dilemma that the central government faces: releasing billions of dollars of government’s capital locked up in the nontradable stocks of the state-owned enterprises (SOEs) without suppressing the stock prices. We also discuss the alternative of using exchange traded funds (ETFs) as a complementary means to expediting the state share conversion process. One of the major difficulties blocking China’s path to becoming a developed capital market is the “state share overhang” problem that hampers the development of the stock market. With almost two-thirds of the outstanding shares of the stock market owned by the central government, investors are wary of the potential sell-off by the government that would inevitably dilute the value of their stock holdings. In this paper, we review the state share reform that aims at solving the dilemma that the central government faces: releasing billions of dollars of government’s capital locked up in the nontradable stocks of the state-owned enterprises (SOEs) without suppressing the stock prices. We also discuss the alternative of using exchange traded funds (ETFs) as a complementary means to expediting the state share conversion process.