Stock Price Discrepancy Of Chinese A- And H- Shares And The Co-movements Of Cross-listed Securities And The Markets

This paper examines Chinese companies that issue both A-shares in the mainland China and H-shares in Hong Kong. A-shares are restricted to mainland China investors except QFII. H-shares are available to Hong Kong and international investors. I find that H-shares exhibit significant exposure to the Hong Kong market factors and behave more like Hong Kong stocks than mainland China stocks, and therefore provide foreign investors with diversification opportunities. I also find a sustained H-share price discount relative to the A-shares and that the time-varying H-share price discount is highly correlated with domestic and foreign market factors and relative market illiquidity.A complementary panel data analysis confirms the preliminary time-series analysis results and also provides support for the liquidity hypothesis that the H-share price discount is positively correlated with the market illiquidity in Hong Kong market. However, Granger-causality tests indicate that there is almost no Granger-caused relation between A-and H-returns, i.e., the past information in A-share returns is not helpful in predicting the movement in H-share returns, and vice versa. Because of the market segmentation induced mainly by ownership restrictions and exchange control in mainland China, the H-share discount may not be easily arbitraged away, at least in the short run.