Over the past few month. the Chinese investors find themselves populating in a clip described by Dickens’ book A Tale of Two Cities – nevertheless. this clip. the two metropoliss being Shanghai and Hong Kong.
In Shanghai. portions are nearing the worst of times. The Shanghai Composite closed below 2. 000 for the first clip since January 2009. and is down two-thirds from its extremum. On the contrary. Chinese portions listed in Hong Kong. are making far better. Since the terminal of August. H portions have risen 15 per cent. despite of the fact that the portions of the same companies listed on the mainland. the fiting A portions. are down over the same period. The undermentioned graphs describe the one twelvemonth index public presentation and 3-month stock monetary value public presentation of Air China and Sinopec listed on the Shanghai ( A portion ) and Hong Kong Stock Exchanges ( H portion ) severally.
Graph ( 1 )
Shanghai Composite Index Hang Seng composite Index Source: Google Finance
Graph ( 2 )
Air China monetary value on Shanghai Exchange Air China monetary value on Hong Kong exchange
Graph ( 3 )
Sinopec monetary value on Shanghai Exchange Sinopec monetary value on Hong Kong
Exchange Beginning: FT Financial Data
Cross listing is the listing of a company’s common portions on different exchanges than its primary and original stock exchange for different investors. A company at the same time listed in Shanghai Stock Exchange ( A-share ) . and Hong Kong Stock Exchange ( H portion ) is an illustration in instance. Now a entire figure of 144 H portions with a entire market capitalisation of 4. 516. 176. 075. 114 ( HK $ ) are listed on the Hong Kong Stock Exchange. Most of the H listed companies are big State Owned Enterprise domiciled in China.
Since the cross-listed H portion and A portion are portions of the same company. basking the same basicss. they should. therefore. hold the same monetary value. harmonizing to the rational Efficient Market Theory. However. as shown on the above graphs. A and H portions experienced the opposite public presentation over the past three months. In add-on. A-shares are historically merchandising at a high premium than the H-shares. It is until late. the stock monetary values of the two portions classes reverse but they ne’er converge.
To track this. there is an index called “Hang Seng China AH Premium Index” which measures the absolute monetary value premium between the A-shares and H-shares of dual-listed companies domiciled in Mainland China. When the AH Premium Index is higher than 100. A portions are merchandising at a premium to H portions. Conversely. when the AH Premium Index is lower than 100. A-shares are merchandising at a price reduction to H-shares. The undermentioned graph of AH Premium Index shows that A-shares as a group are presently merchandising at a different degree over the H-shares.
Beginning: Bloomberg Hang Seng China AH Premium Index
Why do the portions of the same companies and same basicss have different monetary values? Harmonizing the Efficient Market Hypothesis ( EMH ) . because the cross-listed companies have the same hereafter hard currency flows. their portions will meet at last. The fact that their monetary values diverge brutally should be due to the ground that Beta does non mensurate their hazards decently. But the EMH school ne’er gave the appropriate price reduction factor to integrate the hazards. This paper attempts to explicate this phenomenon from a behavioural position. that this cross-listing anomalousness represents the mispricing of the market.
I. Reasons for historic A-share premium
( 1 ) Limits of arbitrage
The tight control of capital market makes no channel of arbitrage exists. doing the arbitrageurs unable to gain from the monetary value derived functions and therefore pressing no force per unit area for the monetary value difference to contract between the two markets.
( 2 ) Limited investing chances for Chinese retail investors and establishments China’s economic growing has been maintained at an mean rate of 8-9 % over the past 10 old ages. This has led to an increased income per capita and wealth accretion. Despite growing in personal wealth. investing options for retail investors are really limited due to comparatively developing local capital markets. In add-on. Chinese investors do non hold the option of puting overseas due to China’s capital history control. As a consequence. this led to roll uping nest eggs sedimentations which amounted to US $ 1. 444Bn as of December 2004.
( 3 ) Limited supply of tradable A-class portions
Compared with the developed market. the supply of tradable A-class portions are rather limited. In peculiar. before the unlocking of non-tradable portions. one tierce of the entire figure of A-shares are tradable. This created a supply crunch for tradable A-shares.
In amount. the immense instabilities between supply and demand of high quality stocks in China. capital limitations combined with high demand from freshly accumulated wealth of the in-between category pushed the A-shares premiums up. Adding to this. the bad attitudes of Chinese retail investors. demonstrated by the really robust turnover rate. thrust further up the monetary values.
( 4 ) Required return
Harmonizing to Fernald and Rogers ( 2002 ) . in the plus pricing position. the difference of the lower rates of return required by domestic A-share investors ( historic and cultural grounds ) compared to those requested by foreign investor translates to higher rating of stock in the A-share market than in the foreign market.
( 5 ) List demands
The listing demands for H-class portions are more rigorous than for those of A or B-class portions. The PRC-domicile companies that wish to name in the H-class portion market must follow with the Hong Kong Stock demands. intending more transparence and higher net incomes quality. On the contrary. direction quality. revelation. and stockholder protection on Mainland China tend non to be held in high respect. As the consequence. the decreased hazards in the developed Hong Kong market lead to the fact that the hazard premium required by the international investors is lower.
II. Reasons for the recent contrary of stock monetary value
( 1 ) Market sentiments
High abroad investor sentiments is one of the major grounds explicating the monetary value derived function between A and H portions. Over the past few months. international investors have been cheerily surprised by some Chinese economic informations. Because the two portion categories are offered to different investors: A-shares are mostly available merely to domestic investors. while H-shares are available chiefly to non-Chinese investors ( like QDII. International investors ) . With most international investors unable to entree the A portion market. they have driven Hong Kong’s H-shares to a premium against the same companies traded in China.
Foreigners might be cocksure. H-shares have traded at a premium when planetary investors are experiencing good. making an reverse correlativity with the Vix. Wall Street’s “fear gauge” . As can be shown in the graph below. Vix is so traded at a lower degree over the past few months. With the Vix stopping point to pre-crisis degrees. it is no surprise that investors are ready to take more hazard and caput to China. When this happened in 2010 and 2011. it combined with domestic purchasing. This clip international investors are entirely.
Graph: 1-year VIX option monetary value at Chicago Exchange
On the other manus. the Chinese domestic investors might be excessively glooming about the equity market. They accordingly overreact to the bad intelligence of companies. taking to even more losingss and terror. Badly burned and greatly disappointed by the go oning bad public presentation of the domestic A-share market. many of them sell their also-rans and expression for other investing vehicles such as the sedimentation merchandises and notes offered by Bankss. The reduced demand of the A-shares has led to the farther lessening of A-share monetary values.
( 2 ) Political grounds
The recent political power displacement might lend to this reversal. We can conceive of there is a bead in graft by Chinese functionaries as the backing webs lose power in front of the new authorities. Less money being bled out of province companies and local governments means less is recycled into A-share equities ( and Macau’s casinos ) . This aid to make a lessening in demand back uping the premium of A-share monetary value.
( 3 ) Media coverage
Based on my observation. chiefly trusting on the mainland Chinese and Hong Kong intelligence web sites. the positions of Chinese media and Hong Kong media has diverged rather dramatically. The Chinese media appears much gloomier in their coverage of the domestic economic system than their Hong Kong opposite number. This perceptual experience prejudice and information provender prejudice by no agencies contribute to the difference of the above mentioned investor sentiments. Decision
For cross-listed A-shares and H-shares. although the foreign and domestic portions are entitled to the same hard currency flow rights and voting rights. differences still exit in assorted facets such as legal environment. investor’s penchants. hazard attitudes. and grade of edification. These
differences have led to the historic A-shares premium over the H-shares. Due to the capital control and demographics differences in the foreseeable hereafter. the monetary value derived functions between A-shares and H-shares will go on to be. Sing the recent underperformance of A-shares than its H-shares opposite numbers. the paper proposed three behavioral based grounds lending to this contrary. From the analysis. we can reason that in developing capital markets such as the Chinese A-share market. the behavioural based analysis of stock public presentation are helpful tools in explain the stock behaviour.
1. Peishee Seah. Why are the portions of People’s Republic of China ( PRC ) -domicile companies with transverse listings in China’s stock exchanges priced otherwise? . Term paper. 2005 2. Eric C. Chang. Jinjuan Ren. Cross-listing and pricing efficiency: The informational and anchoring function played by the mention monetary value. 3. Bloomberg. Google Finance. FT Finance. Hong Kong Stock Exchange information base.