The 2001-2005 price convergence in the A- and H-shares of Chinese state-owned enterprises: A story of unprecedented economic, regulatory and political change

Purpose – The purpose of this paper is to examine the population of Chinese state-owned enterprises (SOEs) listing A- (Chinese Mainland) and H- (Hong Kong) shares with a view to explaining differential pricing across the two stock types. Design/methodology/approach – Despite the fact that both A- and H-shares carry ostensibly the same shareholder benefits, when issued by a given SOE, major pricing differences are apparent. The behaviour of such prices for 20 quarters spanning January 2001 to December 2005 was examined. During this period, a marked contraction in the mean A- to H-price relative occurred, whereby A-prices generally softened and H-prices soared. Findings – It was noted that that the principal factors relevant to the contraction in the A- to H-share price relative relate to two issues: first, an enveloping risk premium centring on state-share disposal fears, and second, the firming of expectations surrounding the likely deployment of a qualified domestic institutional investor (QDII) scheme. Research limitations/implications – Modelling of changing expectations, especially in relation to uncertain policy deployment, is an invidious task. Measurement of such expectations is obviously strewn with difficulties. Originality/value – As pertinent factors largely hinge on the deliberations of the PRC state, the analysis herein provides useful input into how policy can either wittingly or unwittingly shape general share price movements. Such insights are especially important given the evolving nature of the Chinese economy.