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Puzzles in the Chinese stock market

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Author Info
John Fernald
John H. Rogers

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Abstract

Many companies on China's stock markets have separate, restricted classes of shares for domestic residents and foreigners. Other than who can own them, these shares are identical, but foreigners pay only about one-quarter the price paid by domestic residents. We show that plausible differences--about 4 percentage-points--in expected rates of return by foreign and domestic investors can account for the generally higher level and volatility of prices for domestic shares relative to foreign shares. We attribute low Chinese expected returns to the limited alternative investments available in China. We then explore the extent to which various company characteristics can explain cross-company differences in the relative price paid by foreigners. For example, foreigners pay a lower relative price for companies with a higher proportion owned by the state--reflecting, surprisingly, a higher absolute price paid by both foreigners and domestic residents. Several puzzles remain. For example, we are unable to explain why Chinese investors in Shanghai paid lower prices in 1994 and 1995 for companies with their foreign listings in Hong Kong rather than Shanghai.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 619.

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Date of creation: 1998
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Keywords: China ; Stock market - China;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
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  20. Gordon, Roger H. & Li, Wei, 2003. "Government as a discriminating monopolist in the financial market: the case of China," Journal of Public Economics, Elsevier, vol. 87(2), pages 283-312, February. [Downloadable!] (restricted)
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  21. Kang, Jun-Koo & Stulz, Rene M., 1997. "Why is there a home bias? An analysis of foreign portfolio equity ownership in Japan," Journal of Financial Economics, Elsevier, vol. 46(1), pages 3-28, October. [Downloadable!] (restricted)
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Full references

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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Jianping Mei & Jose Scheinkman & Wei Xiong, 2005. "Speculative Trading and Stock Prices: Evidence from Chinese A-B Share Premia," NBER Working Papers 11362, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Jack Ochs & Li Qi, 2006. "Information Use and Transference," Working Papers 236, University of Pittsburgh, Department of Economics, revised Jan 2006. [Downloadable!]
  3. Chan, Kalok & Menkveld, Albert J. & Yang, Zhishu, 2006. "Information Asymmetry and Asset Prices: Evidence from the China Foreign share discount," Serie Research Memoranda 0005, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics. [Downloadable!]
    Other versions:
  4. John Fernald & John H. Rogers, 2000. "Puzzles in the Chinese stock market," Working Paper Series WP-00-13, Federal Reserve Bank of Chicago. [Downloadable!]
    Other versions:
  5. Ahlgren, Niklas & Sjöö, Boo & Zhang, Jianhua, 2003. "Panel Cointegration of Chinese A and B Shares," Working Papers 500, Hanken School of Economics.
  6. John G. Fernald & Oliver D. Babson, 1999. "Why has China survived the Asian crisis so well? What risks remain?," International Finance Discussion Papers 633, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  7. Zhijun Zhao & Yue Ma & Yuhui Liu, 2005. "Equity Valuation in Mainland China and Hong Kong: The Chinese A-H Share Premium," Working Papers 142005, Hong Kong Institute for Monetary Research. [Downloadable!]
  8. John H. Cochrane, 2002. "Stocks as Money: Convenience Yield and the Tech-Stock Bubble," NBER Working Papers 8987, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Rod Tyers & Jane Golley, 2006. "China's Growth to 2030: The Roles of Demographic Change and Investment Risk," ANUCBE School of Economics Working Papers 2006-461, Australian National University, College of Business and Economics, School of Economics. [Downloadable!]
  10. Jianping Mei & Jose Scheinkman & Wei Xiong, 2005. "Speculative Trading and Stock Prices: An Analysis of Chinese A-B Share Premia," Levine's Bibliography 122247000000000867, UCLA Department of Economics. [Downloadable!]
  11. Rod Tyers & Jane Golley, 2006. "China's Growth to 2030: The Roles of Demographic Change and Investment Premia," PGDA Working Papers 1206, Program on the Global Demography of Aging. [Downloadable!]
  12. Alan G. Ahearne & John G. Fernald & Prakash Loungani, 2001. "Countering contagion: Does China's experience offer a blueprint?," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q IV, pages 38-52. [Downloadable!]
  13. Kozluk, Tomasz, 2008. "Global and Regional Links between Stock Markets - the Case of Russia and China," BOFIT Discussion Papers 4/2008, Bank of Finland, Institute for Economies in Transition. [Downloadable!]
  14. Jie Zhu, 2008. "Testing for Expected Return and Market Price of Risk in Chinese A-B Share Market: A Geometric Brownian Motion and Multivariate GARCH Model Approach," CREATES Research Papers 2008-15, School of Economics and Management, University of Aarhus. [Downloadable!]
  15. Ji, Gang, 2005. "Cross listing and firm value - corporate governance or market segmentation? An empirical study of the stock market," BOFIT Discussion Papers 14/2005, Bank of Finland, Institute for Economies in Transition. [Downloadable!]
  16. Gary Gang Tian & Guang Hua Wan, 2004. "Interaction among China-related stocks: evidence from a causality test with a new procedure," Applied Financial Economics, Taylor and Francis Journals, vol. 14(1), pages 67-72, January. [Downloadable!] (restricted)
  17. Roger H. Gordon & Wei Li, 1999. "Government as a Discriminating Monopolist in the Financial Market: The Case of China," NBER Working Papers 7110, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  18. Eric Girardin & Zhenya Liu, 2003. "The Chinese Stock Market: A Casino with 'Buffer Zones'?," Journal of Chinese Economic and Business Studies, Taylor and Francis Journals, vol. 1(1), pages 57-70, January. [Downloadable!] (restricted)
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