This paper contrasts the stock liquidity and stock returns between Chinese state owned enterprises (SOEs) and privately owned enterprises (POEs) before and after the split-share structure reform initiated in 2005. This reform converted a huge volume of non-tradable shares into tradable shares and opened the gate to further privatization of Chinese SOEs. We find the liquidity of SOE stocks was higher than the liquidity of POE stocks before the reform, but their liquidity increased significantly to reach the same level after the reform. Since higher liquidity facilitates arbitrage trading, we hypothesize that arbitrage gains across SOE and POE stocks should shrink after the reform. Consistent with our hypothesis, we find that SOE stock returns stochastically dominated POE stock returns before the reform, but there was no dominance relationship between them after the reform.