The eect of market segmentation on stock
prices: The China syndrome
Qian Sun
a, Wilson H.S. Tong
b,*a
1C-75, Nanyang Business School, Nanyang Technological University, 639798, Singapore b
Department of Finance, School of Business and Management, Hong Kong University of Science and Technology, Clearwater Bay, Kowloon, Hong Kong
Received 22 April 1999; accepted 4 September 1999
Abstract
China has an A-share market that is open only to local investors and a B-share market that is open only to foreign investors. Contrary to what has been observed in other markets with a similar segmented structure, the China B shares trade at a discount relative to the A shares. We show that the phenomenon can still be explained by basic economic principles. Speci®cally, the existence of the H-share and the ``red-chip'' markets in Hong Kong provide good substitutes for the B-share market. We ®nd that when more H shares and red chips are listed in Hong Kong, the B-share discount be-comes larger. This is consistent with the model of dierential demand elasticity pro-posed by Stulz and Wasserfallen (Stulz, R., Wasserfallen, W., 1995. Review of Financial Studies 8, 1019±1057).Ó2000 Elsevier Science B.V. All rights reserved.
JEL classi®cation:G10; G15
Keywords: Market segmentation; A, B, and H shares; Red chips; China market; Demand elasticity
www.elsevier.com/locate/econbase
*Corresponding author. Tel.: +852-2358-7666; fax: +852-2358-1749.
E-mail addresses:aqsun@ntu.edu.sg (Q. Sun), wilson@ust.hk (W.H.S. Tong).
0378-4266/00/$ - see front matterÓ2000 Elsevier Science B.V. All rights reserved.
1. Introduction
The bene®ts of international diversi®cation attract free capital to move across borders. Such bene®ts prompt investors to pay higher prices for foreign stocks than what they would pay at home. Indeed, in segmented markets where companies issue restricted shares that only local citizens can hold and unre-stricted shares that can be held by both local and foreign investors, studies uniformly ®nd that unrestricted shares trade at premium prices relative to those of restricted shares.1 Similarly, the share values of country funds are also found to behigherthan their net asset values (NAVs), just the opposite of the ``closed-end fund puzzle'' in which fundsÕ share values are lower than the NAVs.2
A notable exception is China. Bailey (1994) ®rst documented that, in China, prices of B shares (the equivalent to unrestricted shares in other markets) are selling at a discount relative to their A-share counterparts (the equivalent to restricted shares).3It is puzzling why China is so dierent from other markets. Is the cost of capital cheaper to Chinese investors than to foreign investors? Are Chinese investors risk seekers and willing to pay high prices on their share? What deter foreign investors from investing in the China B-share market to reap diversi®cation bene®ts? Can existing arguments and factors that explain the price premium in other markets also explain theopposite phenomenon in China?
There are only limited studies on this ``strange'' phenomenon. In his pioneer work, Bailey (1994) suggests lower cost of capital for Chinese citizens may be the reason as there are few investment alternatives for Chinese investors. However, as the study was carried out quite early, Bailey has only one-year weekly data from 1992 to 1993 of two stocks in the Shanghai market and six stocks in the Shenzhen market to analyze. Rigorous tests are not possible. A later work by Ma (1996) ®nds that the B-share premium is negatively related to the domestic beta. That means when A-share beta is high, the A-share price is also high. This requires China investors to be irrational and risk seeking. A recent paper by Bailey et al. (1999) provides a comprehensive study on eleven countries that have similar segmentation structure. They examine various factors that can potentially explain the price premium phenomenon, and
ex-1
See Hietala (1989) on Finland, Lam et al. (1990) on Singapore, Bailey and Jagtiani (1994) on Thailand, Stulz and Wasserfallen (1995) on Switzerland, and Domowitz et al. (1997) on Mexico. See also a comprehensive study by Bailey et al. (1999).
2
See Bonser-Neal et al. (1990), De Long and Shleifer (1992), and the comprehensive study by Nishiotis (1997).
3Technically speaking, the B-share market is also a restricted market ± restricted to only foreign
plicitly acknowledge that China is a ``strange case'' and dicult to be ex-plained.
The contribution of this paper is to show a new and viable economic ex-planation to the phenomenon. The exex-planation hinges to a peculiar situation in the China foreign shares. Alongside the B-share market, there is a liquid H-share market and a ``red-chip'' market in Hong Kong. As will be explained later, H shares and red chips are close substitutes for B shares. Hence, unlike other markets, China has more than one market available for foreign investors to invest. If the H-share and red-chip markets are attractive enough to foreign capital, the demand for B shares will then be quite elastic, leading to low equilibrium price of B shares for a given share supply. Indeed, our results provide strong supporting evidence. Although various factors identi®ed by other studies are also related to the B-share price discount phenomenon, the H-share and red-chip issues in Hong Kong provide strong explanatory power. Another piece of supporting though weaker evidence is that the bond issue can also explain the B-share discount. Given that most individuals in China do not have many alternative means to invest, bonds can be an important substitute for A shares. We view all these as consistent with the argument of Stulz and Wasserfallen (1995). There are other factors contributing to the phenomenon. We ®nd some evidence on Chinese investors being speculative. It is conceivable that limited investment alternatives can heat up the speculative sentiment of unseasoned Chinese investors in the stock market. They may also be more optimistic on ®rmsÕ future growth than foreign investors but it is dicult to test. Also, we ®nd some evidence that foreign investors are more sensitive than local investors to changes in macroeconomic conditions, as the in¯ation rate and change in ChinaÕs ocial reserve contribute to the discount phenomenon. This paper proceeds as follows: Section 2 lays out the issue and hypotheses. Some background information about the Chinese market is presented in Sec-tion 3. Data and methodology are given in SecSec-tion 4. Results are discussed in Sections 5 and 6. Section 7 provides some concluding thoughts.
2. Price premium and possible explanations
China is an exception. As will be discussed later, Chinese companies issue A shares strictly to local investors and B shares strictly to foreign investors. It is found that A-share prices are higher than B-share prices. Hence, arguments and factors found useful in explaining the phenomenon observed in other markets may not be useful in explaining the China situation. We ®rst consider four arguments provided in the existing literature as we seek to understand what creates the special situation in the Chinese market.
2.1. The equilibrium pricing argument
When investing in domestic stocks, foreign investors can gain additional diversi®cation bene®ts that domestic investors cannot. As a result, foreign investors require a lower rate of return than domestic investors do. The dif-ference in required rates of return leads to dierence in share prices. In a CAPM world, this also means that the price dierence comes from the dif-ference in the beta risk. Hietala (1989) ®nds supporting evidence for this ar-gument by demonstrating that dierences in the beta risk can explain the price premium in the Finnish market.
On the other hand, based on a simple dividend growth model, share price dierence can also be seen as driven by the dierence inexpectations on the ®rmÕs growth rate by dierent classes of investors. Speci®cally, if the A-share investors expect higher ®rm growth rate than the share investors do, the B-share price will trade at adiscountrather than at apremiumrelative to the A-share price. To paraphrase Domowitz et al. (1998), market segmentation leads to cross-market dierences in information. The A-share price better re¯ects information and expectations held by Chinese locals and the B-share price better re¯ects information and expectations held by foreign investors.
2.2. Dierential demand argument
We are particularly interested in the model set up in Stulz and Wasserfallen (1995) that based on thedierence in demand elasticityof two share classes. In such a scenario, it is optimal for the domestic ®rm to strategically restrict is-suing shares to foreign investors. As long as foreign investors have a relatively inelastic demand on domestic shares, the ®rm can successfully price-discrimi-nate by charging foreign investors a higher share price. Bailey and Jagtiani (1994) and Domowitz et al. (1997) ®nd evidence that changes in the share supply have explanatory power for the price premium. This indicates that the demand curve is downward sloping and thus indirectly supports the model.
ap-proval from the CSRC to issue foreign shares. Yet, the idea of dierences in demand elasticities behind the model of Stulz and Wasserfallen (1995) can still be important. Speci®cally, the China B-share discount phenomenon may be due to foreign investors facing a more elastic demand curve, while local Chi-nese investors are facing a less elastic one. An important determining factor for elasticity of demand is the availability of substitutes. If there are more sub-stitutes for a good, the elasticity of demand for that good will be higher. Bailey (1994) argues that there are few investment alternatives for Chinese investors. Even bank deposit rates are too low to be attractive.4In that case, the demand elasticity for A shares may indeed be low. Yet, government bonds may be important substitutes for equity stock. Interest rates on treasury bonds are set at about 150±200 bp above the savings rates with comparable maturities. In-vestors like to buy bonds and hold them for the coupon and repayment at the end. It is hence conceivable that bond issues take away a certain amount of domestic capital from the A-share market. A recent case is the government bond issue to ®nance the huge budget de®cit of the Chinese government. Ac-cording to a newspaper report, there were long lines of Chinese investors waiting in each of the thousand oces to subscribe to the bond issue.5
On the other hand, if foreign investors could gain diversi®cation bene®ts through investing in Chinese stocksother than B shares, the demand elasticity for B shares would indeed be high. As will be discussed in the next section, H shares are nothing more than the B-share equivalent in Hong Kong. Red chips are essentially Chinese companies incorporated in Hong Kong. Foreign in-vestors would achieve the same kind of diversi®cation bene®ts investing in H shares and red chips or in B shares. The value and attraction of red chips to foreign investors can be revealed through the fact that in November 1998, the International Financial Corporation (IFC) added 11 red-chip stocks into their emerging market composite index. The explanation given was that red-chip stocks have occupied an important position in the eyes of international in-vestors.6As such, the existence of these H shares and red chips are bound to make foreign investorsÕdemand on B shares very elastic.
2.3. A few important factors: Information, liquidity, and currency risk
Diversi®cation bene®ts tempt foreign investors to invest in the domestic market but there are investment barriers that deter such cross-border
in-4
Yet, bank deposits make up the absolute majority of the individualsÕ®nancial assets in China. Seventy percent of the total amount of ®nancial property of individuals are in the form of bank deposits; 20% is in cash; and only 10% is in forms of government bonds, enterprise bonds and stocks (Yu et al., 1998, p. 6).
vestments. A survey by Chuhan (1994) ®nds that liquidity problems and limited information are two key hurdles for investing in emerging markets. Nishiotis (1997) also ®nds that these ``indirect barriers'' have explanatory power for the dierence in closed-end country fund premiums over their NAVs.
These two deterring factors can also work at the ®rm level. Bailey and Jagtiani (1994) argue that it is easier for foreign investors to acquire infor-mation on large ®rms than on small ®rms, so foreign investors are willing to pay a higher premium to invest in large ®rms. On the other hand, relatively illiquid stocks have a higher expected return and are thus priced lower to compensate investors for increased trading costs, as suggested by Amihud and Mendelson (1986). Bailey and JagtianiÕs cross-sectional results con®rm the explanatory power of these two factors on price premium in the Thai market. Domowitz et al. (1997) ®nd supporting evidence for the information avail-ability factor in the Mexican market but not the liquidity factor. They show that the explanatory power comes mainly from share supply. Liquidity has only transitory impact on price premium.
Nishiotis (1997) also argues that foreign investors are more sensitive than local investors to changes in economic factors. Foreign investors can adjust their portfolios across dierent markets easily while domestic investors are typically restricted to their domestic market. Thesemacro factorscan be im-portant to the understanding of the B-share discount in the Chinese market. If these barriers and hurdles are signi®cant, drawing foreign investors to China may indeed require a share price discount. We believe currency risk is one such important macro factor. As China is increasingly opening up to the outside world, its economy depends more on the foreign sectors like international trade, foreign investment and tourism. Hence, currency stability is highly re-lated to macroeconomic stability. If investors of dierent share classes respond dierently to the currency risk factor, that would be re¯ected in the share prices.7
Domowitz et al. (1997) show evidence that higher perceptions of exchange rate risk imply less foreign investment and hence lower price premium. Inter-estingly, in another paper on country and currency risk, Domowitz et al. (1998) ®nd that increases in perceived currency risk widen the gap between the Mexican country fund price premium and the fundÕs NAV. This is consistent with a recent working paper by Yeyati and Ubide (1998). They study the be-havior of closed-end country fund discounts covering the period of the Mex-ican and the East Asian crises. They ®nd that the ratio of country fund prices
7Notice that B-share prices are traded in foreign currencies (either in HKD or USD) and hence,
to their fundamental value increases dramatically during a ®nancial crisis. They interpret that as international investors being less (more) sensitive than do-mestic investors to changes in local (global) market conditions. Hence, their argument is dierent from that of Nishiotis (1997).
In any event, barriers and hurdles like information availability, liquidity premium, and currency risk may also be useful in understanding the B-share discount in the Chinese market. If these barriers and hurdles are signi®cant, drawing foreign investors to China may indeed require a share price discount. On the other hand, if the situation improves, more foreign capital may then ¯ow into these markets to narrow down the price gap between A shares and B shares.
2.4. Speculation argument
Lastly, there is a ``popular'' view of the speculative fever of Chinese inves-tors. If limited investment alternatives mean a relatively inelastic demand for A shares, they can also mean a possible speculative fever. In fact, erratic events like the lottery ticket prices for IPOs being much higher than the stock prices themselves and stock purchases leading to riots in Shenzhen did happen in the early period. When unseasoned Chinese investors speculate on shares with limited supply, it is conceivable that the share prices are pushed beyond their actual values. This can be related to the argument of dierence in expected growth rates. If Chinese investors are too optimistic and have unrealistic view on the growth potential of the ®rms, they will drive up the A-share prices relative to the B-share prices. Certainly, persistent dierence in expected growth rates indicates market ineciency.
In this paper, we test mainly the dierential demand argument and the three important factors. The equilibrium pricing argument can only explain price
premiumbut not pricediscountof unrestricted shares. Also, the ®ndings of Ma (1996) require China investors to be risk lovers. On the other hand, Bailey and Jagtiani (1994) do not ®nd any signi®cant relationship between ®rm betas and the price premium in the Thai market. The comprehensive study of Bailey et al. (1999) on the 11 markets also con®rms that the equilibrium pricing model cannot explain the price premium phenomenon. Hence, we think it cannot be an explanation for the Chinese phenomenon either.8For the speculative ar-gument, although there are many anecdotal evidences for that, rigorous tests are dicult to construct.
8In the earlier version of this paper, we did test the beta factors and did not ®nd statistical
3. The Chinese market
A major eort in ChinaÕs reforms is to privatize state-owned enterprises. The government selects some state-run factories and restructures them to allow the most attractive parts of these plants to form new companies. Hence, a new company so formed is often only a fraction of the original enterprise.9Shares are then issued and sold to the public as well as to foreign investors.
3.1. The public A and B shares
A Chinese company can issue ®ve types of shares in the domestic market: state shares, legal person shares, employee shares, tradable A shares and B shares. Only the last two types of shares are freely tradable. A shares are or-dinary equity shares available exclusively to Chinese citizens and domestic institutions. When going public, companies are required to issue no less than 25% of their total outstanding shares as tradable A shares.
B shares are issued to attract foreign capital. The ®rst B-share issue was in 1992. Firms can choose to list their B shares on either of the two national exchanges, the Shanghai Stock Exchange (SHSE, established in December 1990) and the Shenzhen Stock Exchange (SZSE, established in April 1991), but not both. B shares can only be bought by and traded amongst foreign inves-tors. Since the RMB is not convertible under capital accounts, B shares are traded in either US dollars (in the SHSE) or HK dollars (in the SZSE).10
3.2. The foreign H and N shares
Compared with the newly established Chinese stock market, Hong KongÕs mature market should make a bigger contribution in channeling foreign funds to mainland Chinese enterprises. Indeed, beginning in 1993, Chinese enter-prises started applying to list in Hong Kong asH shares. They are selected for their economic importance, management quality, technology, pro®tability and international signi®cance. Led by Tsingtao Brewery, the ®rst batch of H shares listed in the SEHK had great success. Tsingtao Brewery received 110 times over-subscription and the six H-share companies together raised more than a billion US dollars. There are currently 41 ®rms issuing H shares on the SEHK. Firms that issue B shares or H shares also issue A shares but, as far as we know, only three ®rm issues both B shares and H shares.
9
For example, Shanghai Petrochemical is basically a complete town with hotels, schools, housing and a college. When listed in 1993, the company consisted only of some selected buildings, a plant and equipment.
There areN shareslisted in the New York Stock Exchange but the market has been very thin. To limit foreign ownership, the Chinese government allows no more than 49% of a companyÕs convertible shares to be B, H or N shares. The breakdown ®gures are given in Table 1.
The ®gures reveal the fact that the privatization of SOEs is quite limited. On the average, less than 40% of total shares are issued for public holding. Shares issued for foreign ownership (B-shares and H-shares) are minimal.
3.3. The red chips
There are some state-backed companies that typically represent the interests of ChinaÕs leading ministries, the State Council, and provincial and municipal authorities. These companies control companies in related industries around the country. When these mainland ®rms look for expansion and overseas capital, they typically ®nd ways to gain listing in Hong Kong, either through direct IPO or through backdoor listing. As these companies are incorporated and listed in Hong Kong, they are technically Hong Kong companies though their capital and businesses are largely based in China. Companies like CITIC Paci®c, COSCO Paci®c, Beijing Enterprises Holdings and Shanghai Industrial Holdings are powerful, diversi®ed conglomerates that have grown rapidly by injecting assets from their parent companies and raising funds for new in-vestments. As such, they have acquired a nickname, ``red chips''. Unlike H-share companies, which tend to specialize in a single activity like heavy in-dustry or infrastructure projects, businesses in red-chip companies are more diversi®ed.
4. Data and methodology
The panel-data method is used to test the hypotheses. Our regression model is as follows:
Premit aib0XitciPremitÿ1eit i1;2;. . .;N; t1;2;. . .;T:
1
however, it may be heteroscedastic. The lag premium term Premitÿ1is included
to ®lter out a high degree of auto-correlation as in Domowitz et al. (1997).Xitis a vector of proxy variables used to test various hypotheses.
Table 1
Ownership distribution of Shanghai and Shenzhen listed companiesa
1994 1995 1996 1997
Panel A: The Shanghai Stock Exchange
State shares (%) 33.5 32.5 33.9 32.0
(28.9) (30.3) (28.9) (26.8)
Legal person shares (%) 35.5 37.8 31.4 29.6
(31.9) (33.3) (29.4) (27.5)
A shares (%) 19.9 19.4 24.9 28.8
(20.3) (20.3) (18.1) (15.8)
Employee shares (%) 4.6 4.3 3.2 2.8
(8.5) (9.5) (7.4) (6.3)
B shares (%) 4.0 3.7 4.3 4.2
(11.2) (10.7) (11.8) (11.8)
H shares (%) 1.1 0.9 1.1 1.1
(6.0) (5.4) (6.0) (5.9)
Panel B: The Shenzhen Stock Exchange
State shares (%) 28.1 35.7 34.5 31.1
(26.5) (46.4) (44.4) (26.4)
Legal person shares (%) 34.1 38.1 33.0 30.8
(26.0) (31.0) (26.7) (26.4)
A shares (%) 31.9 17.4 24.8 29.6
(14.1) (19.1) (16.8) (13.3)
Employee shares (%) 2.3 7.6 5.5 4.0
(5.0) (13.3) (9.9) (7.5)
B shares (%) 3.6 2.9 3.3 3.7
(8.1) (8.8) (8.7) (9.7)
H shares (%) 0.0 0.2 0.3 0.5
(0.0) (2.3) (3.3) (5.4)
Panel C: Number of listed companies SHSE
A shares only 137 152 251 333
B shares only 2 4 6 11
Both A & B shares 32 32 36 39
SZSE
A shares only 96 101 194 311
B shares only 2 8 10 14
Both A & B shares 22 26 33 37
a
4.1. Proxies to test the dierential demand argument
We ®rst test if the demand curve is downward-sloping. The ratio of the outstanding number of A and B shares (NoB/NoA) captures the relative share supply of the two markets. If demand curves are downward sloping, the variable should enter signi®cantly negatively into the regression. When the supply of B shares increases relative to the supply of A-shares, price pressure would push B-share prices to drop relative to A-share prices.
To examine speci®cally the possibility of dierence in the elasticity of domestic and foreign demands for A and B shares respectively, we look at their substitutes. For an A-share substitute, we look at the bond issue. The variable is the value of the government bond issue, ``Bond''. If it is indeed an A-share substitute, the variable should be positively related to the price premium.
For close substitutes of B-share stocks, we look at H shares and ``red-chip'' stocks. Two pairs of proxy variables are used to capture the possible impact of H shares and red-chip stocks on the price premium: the number of H-share ®rms and red-chip ®rms listed in Hong Kong and their trading volume as a percentage of SEHKÕs trading volume. If the dierence in elasticity of demand is an important factor to the B-share discount, the four variables will be negatively related to the price premium. Since the two pairs of variables are highly correlated, they should be run in two separate regressions.
4.2. Proxies to test important factors
We use market capitalization ``MV'' to proxy for the information factor and the ratio of trading volume (VolB/VolA) for the liquidity factor. The total market capitalization of a ®rm is the sum of the A-share and B-share market capitalization. If ®rm size is important, the variable should be positively related to the price premium. If the B-share discount is due to the lack of liquidity of the B-share market, the relative trading volume should be positively related to the price premium.
Although we do not intend to test the speculative argument, we think that stock return volatility is a ``simple'' way to partially capture the speculative activities of Chinese investors. Speci®cally, we look at the relative volatility (StdB/StdA) where StdB and StdA are the standard deviation of B-share and A-share returns, respectively. Given that the pair of A and B stocks share identical information of the ®rm, any A-share volatility in excess of the B-share volatility can be viewed as due to speculative trading. If excessive speculation leads to the A-share price being traded at a premium relative to the corre-sponding B-share price, we would expect a positive relationship between the variable and the B-share premium.
We work on monthly data except when calculating the monthly volatility, we use daily price data. Exchange rates, share prices and trading volume are from the Datastream International, supplemented with the Extel Database when necessary. The number of shares outstanding is from the Taiwan Eco-nomic Journal (TEJ) Data Bank. MacroecoEco-nomic data are from the Interna-tional Financial Statistics of IMF. Our sample has totally 40 H-share ®rms, 38 red-chip ®rms, 10 ®rms with both and H-shares, and 45 ®rms with both A-and B-shares. Among these 45 ®rms, 25 are listed on the SHSE A-and 20 on the SZSE. The series span from April 1994 to February 1998.
We begin our sample study in April 1994, the time when the ®rst interbank market in China began to operate. We believe the exchange rates then were closer to the market-determined rates.11 Also, we want to avoid the early period when the Chinese stock markets were at the infant stage. As mentioned before, erratic events happened in the early period.
5. Preliminary examination
5.1. General comparison
To get a general idea on the behavior of various markets, we compute general statistics on share prices, return, volatility, trading volume, and market value. The results are shown in Table 2.
Panel A gives the statistics of all 45 ®rms in our sample. Panels B and C separate Shanghai ®rms from Shenzhen ®rms. Panel D gives the statistics of 10 ®rms in our sample that issue both A shares and H shares. Panels E and F give
11
Average monthly statistics on stock prices, trading volumes, and volatilitya
94.04±98.02 94.04±94.12 95.01±95.12 96.01±96.12 97.01±97.12
Panel A: Combined sample of 45 Shanghai and Shenzhen ®rms
Average B premium )0.5635 )0.3192 )0.5400 )0.6189 )0.6792
Standard deviation 0.2665 0.3732 0.2491 0.1711 0.1088
Average A volume 25458.67 27031.53 14071.79 36934.91 26940.83
Average B volume 9234.32 4506.85 19302.96 7000.63 5703.63
Average A return 0.00666 )0.00490 )0.01817 0.03929 0.00689
Average B return )0.00993 )0.01943 )0.02864 0.04237 )0.04453
Average A volatility 0.03445 0.04938 0.02739 0.03447 0.03217
Average B volatility 0.03329 0.02673 0.02768 0.03842 0.03679
Average number of A shares 47120.09 39576.64 43503.61 48477.72 53473.43 Average number of B shares 95521.06 80090.01 87338.19 96408.45 110343.60 Average market value 78969.01 65064.44 58238.85 72969.55 113267.50 Standard deviation 76415.03 53979.59 47316.22 62818.98 105745.50
Panel B: Sample of 25 Shanghai ®rms
Average B premium )0.6613 )0.4537 )0.6820 )0.7003 )0.7310
Standard deviation 0.2159 0.3559 0.1363 0.1264 0.0941
Average A volume 16181.56 29487.37 10898.37 13821.88 15531.85
Average B volume 6651.38 7173.72 6786.38 5224.68 7405.50
Average A return 0.00327 0.01186 )0.01825 0.00452 0.01380
Average B return )0.01136 )0.01054 )0.02602 0.01503 )0.03806
Average A volatility 0.03404 0.05245 0.02876 0.03166 0.02999
Average B volatility 0.03369 0.02858 0.02842 0.03507 0.03870
Average number of A shares 33221.44 28426.36 31000.16 32875.23 38060.88 Average number of B shares 106854.90 92871.29 98480.53 106391.70 122319.50 Average market value 68766.28 70152.06 63628.15 58921.55 81921.01 Standard deviation 61242.23 62947.88 55573.43 44439.66 73913.74
Panel C: Sample of 20 Shenzhen ®rms
Average B premium )0.4414 )0.1512 )0.3626 )0.5172 )0.6144
Standard deviation 0.2732 0.3228 0.2444 0.1650 0.0894
Q.
Sun,
W.H.S.
Tong
/
Journal
of
Banking
&
Finance
24
(2000)
1875±1902
Table 2 (Continued)
94.04±98.02 94.04±94.12 95.01±95.12 96.01±96.12 97.01±97.12
Average A volume 37055.05 23961.75 18038.56 65826.20 41202.05
Average B volume 12463.00 1173.25 34948.68 9220.57 3576.29
Average A return 0.01089 )0.02583 )0.01807 0.08276 )0.00173
Average B return )0.00813 )0.03054 )0.03190 0.07655 )0.05262
Average A volatility 0.03496 0.04554 0.02569 0.03798 0.03490
Average B volatility 0.03279 0.02440 0.02675 0.04260 0.03441
Average number of A shares 64493.41 53514.49 59132.93 67980.84 72739.12 Average number of B shares 81353.72 64113.41 73410.25 83929.43 95373.83 Average market capitalization 91722.42 58704.90 51502.23 90529.55 152450.50 Standard deviation 90317.76 39117.74 33093.19 76520.34 124768.30
Panel D: Sample of ®rms with both H and A shares
Average H premium )0.26290 0.59082 )0.03935 )0.45239 )0.52927
Standard deviation 0.66904 1.04199 0.58978 0.36923 0.32533
Average A volume 112011.80 71508.56 108330.00 176775.20 95659.38 Average H volume 162170.70 79370.54 55176.39 75795.14 396988.90
Average A return 0.00754 )0.00151 )0.00544 0.03286 )0.00790
Average H return )0.02005 )0.02273 )0.04020 0.02167 )0.04648
Average A volatility 0.03458 0.04737 0.03425 0.03245 0.02637
Average H volatility 0.03178 0.02457 0.01649 0.01947 0.04425
Average number of A shares 217853.84 247273.29 210989.30 210989.30 210909.30 Average number of H shares 635811.89 627322.86 621126.00 621126.00 671126.00 Average market capitalization 535174.80 182769.82 272948.55 636144.22 962000.97 Standard deviation 907185.30 330018.23 406984.70 976786.34 1256680.20
Panel E: Red chips
Number of ®rms at year end 38 34 36 37 38
Average return 0.00380 )0.05991 )0.02122 0.06369 0.00937
Average volume 186191.60 43046.86 40097.58 112133.00 454200.70
Average volatility 0.02522 0.01471 0.01212 0.01283 0.03724
Average number of shares 1189959.48 1008441.09 1066300.95 1095677.93 1402903.62 Average market capitalization 678303.68 355953.75 308715.20 541039.54 1264266.62
Q.
Sun,
W.H.S.
Tong
/
Journal
of
Banking
&
Finance
24
(2000)
Average return )0.01253 )0.02132 )0.02869 0.02155 )0.02560
Average volume 85870.84 71170.92 30018.91 49404.58 181717.20
Average volatility 0.02689 0.02267 0.01667 0.01751 0.03630
Average number of shares 662717.9 621405.6 613032.8 631841.3 742388.2 Average market capitalization 240093.7 169006.9 129483.3 286264.1 310923.4
aThis table provides information on average monthly premium, trading volume, return, volatility, number of shares outstanding and market
capi-talization for sample ®rms listed on the Shanghai, Shenzhen, and Hong Kong Stock Exchanges. The B-share premium is de®ned as (PB±PA)/PA. Similarly, the H-share premium is PBÿPA=PA. All prices are converted into US dollars. Return is derived from the log dierence of month-end prices. Volatility is de®ned as the standard deviation of daily returns within a month. Market capitalization is the summation of market value of tradable A and B (or H) shares of a ®rm. Market capitalization is in terms of thousand US$. Trading volume and number of outstanding shares are in thousand shares.
Q.
Sun,
W.H.S.
Tong
/
Journal
of
Banking
&
Finance
24
(2000)
1875±1902
statistics of all red chips and H shares listed in Hong Kong during our sample period.
To facilitate comparisons, for each variable, we compute the dierence be-tween A shares and their corresponding B shares (or H shares). These variable dierences (except the return dierence) are then normalized by their corre-sponding value of the A-share variable. For instance, the B-share volatility dierential is computed as rBÿrA=rA. The cross-sectional average of the
variables over all 45 stock pairs in the sample is denoted as ``(B±A)/A Vola-tility''. Similarly, the H-share volatility dierential is computed as rHÿrA
=rA and the cross-sectional average of 10 stock pairs is denoted as ``(H±A)/A
Volatility''. The comparisons are graphically presented in various panels of Fig. 1.
Panel A gives the ®rst sense of the issue discussed in this paper, the price premiums. We compute two average premium series. ``(B±A)/A Price'' is the cross-sectional average of B-share monthly price premiums of the 45 sample ®rms on the SHSE and SZSE. ``(H±A)/A Price'' is the cross-sectional average of H-share monthly price premiums of the 10 sample ®rms on the SEHK. The plot clearly shows that B shares are always traded at heavy discount. The overall discount over the sample period is)0.56 (Panel A of Table 2). In fact, based on the study of Bailey (1994), B shares were traded at discounts relative to their A-share prices all along from March 1992 to February 1993.
Although our focus is on the B-share premium, a contrast with the H-share premium can shed light on the issue. Notice that H shares were trading at a premium relative to their corresponding A shares in the early sample period. However, the premium could not be sustained and it turned into a discount subsequently, just like with the B shares, only with a smaller magnitude. These observations are so important that we will take a closer look after ®nishing other comparisons.
Fig
.
1.
Compa
riso
n
of
A±B
shares
and
A±H
sha
Hong Kong market is a better channel to attract foreign capital.12 Panel E shows that the trading volume of B shares is 65% lower than that of their A-share counterparts. But the trading volume of H A-shares is 45% higher than that of their corresponding A shares. Again, the big jump in the trading volume of H shares in 1997 is due to the Hong Kong hand-over. In short, for the 45 A±B pairs, the A-share market is more liquid, more volatile, and yields higher returns than the B-share market. For the 10 A±H pairs, the situation is similar except that the H-share market is more liquid. Notice that in Panel F, the market value of ®rms issuing H-shares is almost 600% larger than the market value of ®rms issuing B shares. Yet, as shown in Fig. 2, red-chip shares are even bigger.
On the average, red chips are 16% bigger than H-shares and have 40% more outstanding stocks.13 Not just that, their shares bear volatility that is 30% lower than that of the H shares and have a trading volume that is 20% higher. The return tends to be higher, too. All these point to the fact that the H-share and red-chip markets are important and signi®cant counterparts of the A±B-share markets.
5.2. Comparison of price premiums
Going back to the issue of the dierence between B-share and H-share premiums, we take a closer look at Panel A of Fig. 1 by plotting the monthly
Fig. 2. Comparison of H shares and red-chip shares.
12
For certain, this does not mean foreign investors are major shareholders. Non-tradable shares are excluded in the comparisons here.
13The H shares here contain a larger set of 40 ®rms, which include the 10 matched H±A ®rms
premiums through time in Fig. 3. The overall average premium of 45 ®rms, now denoted as ``Ave'', is further decomposed into two average premium se-ries. ``Avesh'' is the cross-sectional average of B-share premiums of the 25 sample ®rms on the SHSE and ``Avesz'' is the average premium of the 20 sample ®rms on the SZSE. The cross-sectional average premium of 10 H-shares is now denoted as ``Aveh''.
It becomes clearer how the price premiums evolve through time. H shares traded at premium initially until the end of 1994.14 This is consistent with what has been found in other markets. H shares, which were opened to foreign investors, traded at a premium with respect to their A shares. Hence, what is special about China is that the H-share premium is not sustained and that the B-share market keeps trading at a discount. Notice that H-sharediscounttends to be smaller than the B-share discount although, in a few incidences, it is larger than the B-share discount in the Shenzhen Exchange. In fact, the
dis-Fig. 3. Average price premium. For the 25 sample companies that issue both A and B shares in the Shanghai Stock Exchange, their monthly price premiums (de®ned as (PB±PA)/PA) are computed through time. ``Avesh'' is the cross-sectional average of the 25 price premiums. For the 20 sample companies that issue both A and B shares in the Shenzhen Stock Exchange, their monthly price premiums (de®ned as (PB±PA)/PA) are computed through time. ``Avesz'' is the cross-sectional av-erage of the 20 price premiums. ``Ave'' is the cross-sectional avav-erage of the combined 45 price premiums. For the 10 sample companies that issue both A and H shares, their monthly price premiums (de®ned as (PH±PA)/PA) are computed through time. ``Aveh'' is the cross-sectional
av-erage of the price premiums. Notice that the sample size of Aveh changes through time (see footnote 12).
14
count in the Shenzhen Exchange is consistently smaller than in the Shanghai Exchange.15
As mentioned before, the speculation argument views price dierential as an ``A-share premium'' phenomenon. That is, Chinese investors keep chasing after the limited supply of A-shares, which caused these shares to be overpriced. Though we will test this argument later, the casual observation here already suggests that this cannot be the only reason for the phenomenon. If the cause is with the A shares, it is not easy to explain why H shares would trade at a
smallerdiscount than B shares. Recall that H-share ®rms have been chosen for their good management and good pro®t potential. They also need to meet stringent requirements set by the SEHK and have greater and better infor-mation disclosure than B-share ®rms. Hence, we would expect that Chinese investors would chase more after ®rms issuing H shares than those issuing B shares, leading to a larger H-share discount. However, if we view the phe-nomenon as a B-share discount, it can be easily interpreted as foreign investors discounting less on H shares than on B shares due to the ``endorsement'' of the H shares by the SEHK.
One more piece of information can be drawn from Panels E and F of Fig. 1. Studies typically ®nd that ®rm size and market liquidity are important factors for price premium. Yet, from our comparisons, it is clear that although H-share ®rms are much larger in size and their H-shares are more heavily traded than B-share ®rms, share prices of both H- and B-share ®rms trade at a dis-count relative to their A-share dis-counterparts. This strongly suggests that ®rm size and liquidity cannot be crucial factors for the price discount phenomenon.
6. Panel analysis results
After the general comparisons, we carry out more rigorous tests. A panel regression of model (1) is done on the whole sample data and results are re-ported in Table 3.
Column (1) shows the basic result of the regression. For the dierential demand argument, the ®rst variable to look at is ``NoB/NoA'', the relative supply of B shares and A shares. The regression estimate is signi®cantly neg-ative with at-value of ÿ4:86. This is consistent with the hypothesis that the greater the supply of B shares relative to A shares, the lower the B-share prices
15
Table 3
Pooled regression results (combined sample of Shanghai and Shenzhen ®rms)a
(1) (2) (3) (4)
Total Panel Obs. 2070 2070 2070 2070
NoB/NoA )0.000435 )0.000352 )0.000390 )0.000300
()4.865) ()3.835) ()4.301) ()3.243)
In¯ation )0.006014 )0.002568 )0.006801 )0.001057
()8.572) ()5.625) ()9.560) ()2.087)
DFXR 0.001530 0.000993 0.009030 0.009853
(2.158) (1.695) (5.981) (6.486)
StdB/StdA 0.003112 0.001189 0.004192 0.002757
(3.303) (2.493) (3.758) (3.145)
Prem()1) 0.649472 0.733253 0.653474 0.732628
(41.539) (48.326) (42.056) (48.775)
Trend )0.001002 )0.001239
()5.606) ()6.951)
AdjustedR2 0.7144 0.7023 0.7182 0.7087
Durbin±Watson 2.1017 2.1256 2.0766 2.0760
a
A general ®xed-eects pooled regression model of the following form is run on share price pre-mium:
Premitaib0XitciPremitÿ1eit i1;2;. . .;N; t1;2;. . .;T:
``Prem'' is the percentage price premium de®ned as (PB±PA)/PA.PBandPAare contemporaneous
month end prices of B- and A-shares of the same company. All prices are converted into USD denomination.Xare the chosen explanatory variables. All variables are transformed into deviation form. ``No'' is the number of shares outstanding. ``Bond'' is the dollar amount of bond issue. ``H'' and ``Red'' are the number of H-share and red-chip companies listed in the Hong Kong stock market. ``Hper'' and ``Redper'' are monthly H-share and Red-chip trading volume as a percentage and Hong Kong market trading volume respectively. ``Vol'' is the trading volume. ``MV'' is the market capitalization. ``In¯ation'' is the monthly log dierence of ChinaÕs CPI. ``DFXR'' is the monthly change of ChinaÕs ocial foreign exchange reserve. ``Std'' is the standard deviation. ``Prem()1)'' is the premium lag term to ®lter out the ®rst-order serial correlation. Numbers inside
the parentheses are heteroskedasticity-consistentt-statistics.
relative to the A-share prices, and the bigger the B-share discount (the smaller the ``Prem'' variable).
The substitutes for A shares are bonds. The bond supply variable ``Bond'' is positively related to the B-share premium with at-value of 2.35. When bond supply increases, A-share prices drop. This is consistent with the conjecture that bond issuance drags investment money away from the A-share market. When the demand curve is downward sloping, the selling pressure drives A-share prices down.
A more direct test on the dierence in demand elasticity is to look at the proxies of share substitutes. The substitutes for B shares are H shares and red chips. The two variables, the number of H-share ®rms (H) and the number of red chip ®rms (RED) listed in the SEHK enter very signi®cantly into the re-gression with negative signs. The H variable has an estimate of)0.0056 with a
t-value of)5.54 and the RED variable has an estimate of )0.0209 with at -value of )7.04. Negative signs mean that the more these companies are available in the Hong Kong market for foreign investors to invest, the larger the B-share discount would be. This provides evidence that the existence of the H-share and the red-chip markets aects the B-share price discount. It may be worth mentioning that the importance of bond supply is limited. When the regression is done only on H and Red, the adjustedR2 value is practically the same (not reported here).
For the possible impact of factors discussed above, we look at the liquidity factor ®rst. The variable VolB/VolA is the relative trading volume between B shares and A shares. It enters signi®cantly into the regression with at-value of 1.96. A positive relationship between this volume ratio and the B-share pre-mium suggests that relatively heavy trading activity in the B-share market would reduce the B-share discount. This result supports the liquidity argument of price premium and is consistent with the ®ndings of Bailey and Jagtiani (1994) but not with the ®ndings of Domowitz et al. (1997). The positive rela-tionship hence supports the liquidity argument for price premiums.
value of A-share market value than the B-share market value. In this respect, MV and Prem are bound to be negatively correlated because, by de®nition, Prem is a negative function of the A-share price. If this time-series mechanical relationship is dominating, it will show up in the pool result.
The in¯ation rate, as a proxy for currency stability, enters signi®cantly negatively into the regression with at-value of)8.57. When the in¯ation rate goes up, there is a downward pressure on the RMB and foreign investors seem to react more negatively than do local investors. Consequently, B-share prices drop more than A-share prices. Similarly, the change in ocial reserve (DFXR) has a signi®cant, positive relationship with price premium. The t -value is 2.15. As the change in ChinaÕs ocial reserve increases, foreign in-vestors have more con®dence on the RMB stability and the B-share price goes up. All these are consistent with the view that foreign investors react more strongly to changes in ChinaÕs macroeconomic situation than local investors do.
The relative volatility between the B- and A-share markets, StdB/StdA, captures the speculative activity of A-share traders. The regression coecient gives at-value of 3.30 which means that higher of the A-share market volatility relative to the B-share market volatility would lead to a larger B-share discount (larger A-share premium). Chinese investorsÕspeculation on A shares seems to be related to the A-share price premium.
The lag term Prem()1) enters the equation very signi®cantly, which echoes the ®ndings of Domowitz et al. (1997). All these variables explain 71% of the B-share discount, as shown by the value of the adjustedR2.
We also test the importance of the H-share and red-chip markets using the trading volume data. We run Model (1) again but replace the variables H and RED by Hper and Redper. Recall that the latter two variables are, respectively, the trading volumes of H shares and red-chip shares relative to the trading volume of the SEHK during the same period. The result is presented in Col-umn 2 of Table 3. Again, the coecient estimates of the two volume variables are highly signi®cant with a negative sign. That is to say, when the relative trading volume of the H-share market and/or the red-chip market goes up, B-share prices tend to trade at a greater discount from A-B-share prices. This re-con®rms our view that these two markets are substitutes for the B-share market. On the other hand, the other variables give qualitatively the same results as in Column 1 of Table 3.
neg-ative sign. This indicates that the price premium tends to have a downward trend. However, after ®ltering out the eect, those explanatory variables pre-viously signi®cant in Column 1 still remain signi®cant with essentially the same magnitudes. When Hper and Redper are used as proxies for the H-share and red-chip market activities, the trend variable is also negatively signi®cant (Column 4). Again, the regression results of all the other explanatory variables are essentially the same as in Column 2.
To investigate further the argument of dierential demand elasticity, we split the sample into a ``Shanghai sample'' that consists of companies listed in the SHSE and a ``Shenzhen sample'' that consists of companies listed in the SZSE. Pooled regression is then run separately on the two samples. We try to exploit the fact that H-share ®rms are predominantly dual-listed in the SHSE.16If the substitution eect of H-shares is important to the B-share discount phenom-enon, we would observe the H-share factor (i.e., the number of H-share ®rms listed or the trading volume) to have a greater impact on the price premium variable in the pooled regression on the Shanghai sample than on the Shenzhen sample Table 4.
To save space, we just report results of regressions with a time trend, as the ones with no time trend are basically the same. The ®rst thing to notice is that the results are qualitatively the same as in Table 3 in general except that for the Shanghai sample, NoB/NoA now becomes insigni®cant. Our major interest is the contrast in results between the Shanghai and the Shenzhen samples on the H-share and red-chip variables. For the Shanghai sample, the H variable in Column 1 gives a regression coecient of ÿ0:0057 with a large t-value of
ÿ4:53. Its counterpart in the Shenzhen sample is ÿ0:0044 with a t-value of
ÿ2:68, as shown in Column 3. The comparison clearly shows that the H-share issue has a bigger and stronger impact on the price dierence for Shanghai stocks than for Shenzhen stocks. This is consistent with the explanation that H-shares are closer substitutes for Shanghai B-H-shares than for Shenzhen B-H-shares because H-share ®rms are also listed on the SHSE.
When looking at the trading volume instead of the number of H ®rms listed, the comparison gives qualitatively the same. The trading volume of H-shares, Hper, gives a regression estimate of ÿ0:7510 with a t-value of ÿ4:47 for Shanghai stocks (Column (2)) and an estimate of ÿ0:6922 with a t-value of
ÿ3:14 for the Shenzhen stocks (Column 4). These ®gures again con®rm that H-shares have a greater impact on the Shanghai price dierence than on the Shenzhen price dierence.
Interestingly, the situation for red-chip factor gives opposite results. In Column 1 of the Shanghai sample, the red-chip issue RED has a regression
16Out of 41 H-share ®rms, there are only three H shares dual-listed in Shenzhen, Angang Iron
Table 4
Pooled regression results for separate samples of Shanghai and Shenzhen ®rmsa
(1) (2) (3) (4)
Shanghai Shanghai Shenzhen Shenzhen
Total panel obs. 1150 1150 920 920
NoB/NoA 0.000240 0.000436 )0.000364 )0.000293
(0.583) (1.075) ()3.852) ()3.046)
VolB/VolA 0.005038 0.005863 8:4210ÿ4 0.000914
(4.249) (4.864) (1.830) (1.974)
MV ÿ3:5410ÿ7 ÿ2:8910ÿ7 ÿ2:2410ÿ7 ÿ1:1010ÿ7
()3.412) ()2.755) ()3.791) ()1.755)
In¯ation )0.006721 )0.000602 )0.006906 )0.001936
()7.502) (0.950) ()5.872) ()2.224)
DFXR 0.009797 0.010699 0.007686 0.008321
(5.148) (5.622) (3.113) (3.328)
StdB/StdA 0.002559 0.001033 0.001839 0.000338
(2.745) (2.302) (2.542) (1.970)
Prem()1) 0.619425 0.700080 0.665878 0.739668
(28.381) (32.911) (28.598) (33.050)
Trend )0.001139 )0.001401 )0.000968 )0.001202
()4.726) ()5.873) ()3.331) ()4.119)
AdjustedR2 0.6137 0.5998 0.7944 0.7881
Durbin±Watson 2.1327 2.1371 1.9968 1.9701
a
A general ®xed-eects pooled regression model of the following form is run on share price pre-mium:
Premitaib0XitciPremitÿ1eit i1;2;. . .;N; t1;2;. . .;T:
``Prem'' is the percentage price premium de®ned as (PB±PA)/PA.PBandPAare contemporaneous
month end prices of B- and A-shares of the same company. All prices are converted into USD denomination.Xare the chosen explanatory variables. All variables are transformed into deviation form. ``No'' is the number of shares outstanding. ``Bond'' is the dollar amount of bond issue. ``H'' and ``Red'' are the number of H-share and red-chip companies listed in the Hong Kong stock market. ``Hper'' and ``Redper'' are monthly H-share and Red-chip trading volume as a percentage and Hong Kong market trading volume respectively. ``Vol'' is the trading volume. ``MV'' is the market capitalization. ``In¯ation'' is the monthly log dierence of ChinaÕs CPI. ``DFXR'' is the monthly change of ChinaÕs ocial foreign exchange reserve. ``Std'' is the standard deviation. ``Prem()1)'' is the premium lag term to ®lter out the ®rst-order serial correlation. Numbers inside
the parentheses are heteroskedasticity-consistentt-statistics.
coecient of)0.0162 with at-value ofÿ4:32. But in Column 3 of the Shenzhen sample, it has a coecient ofÿ0:0257 and at-value of ÿ5:34. That is to say that the red-chip issue is more important to the Shenzhen price dierence than to the Shanghai price dierence. A similar result of red-chip trading activity is found in Columns 2 and 4. If we believe many market players in the Shenzhen B-share market are Hong Kong investors or local Chinese investors who can get access to the Hong Kong market, probably due to geographical as well as economic anity, then the result can also be viewed as supportive of the substitution argument. That is, red-chip shares are closer substitutes for the Shenzhen B-shares than the Shanghai B-shares. When the red-chip market is hot, Hong Kong investors move their capital away from the Shenzhen B-share market and invest it on the Hong Kong red-chip market. However, we do not have hard evidence for this.
7. Conclusion
Although B shares in the China market trade at a discount relative to their A-share counterparts, directly opposite to what has been found in other markets, we have demonstrated that the phenomenon can still be explained by basic economic principles. Speci®cally, the existence of the H-share and the red-chip markets provides good substitutes for the B-share market so foreign investorsÕ demand for B-shares could be quite elastic. When more H shares and red chips are listed in Hong Kong, foreign investors move away from the B-share market. This is more apparent in the Shanghai Stock Exchange. Since H-share ®rms are predominantly dual-listed in the Shanghai Stock Exchange, H shares are closer substitutes for Shanghai B shares than for Shenzhen B shares. We do observe that H-share issue has a greater impact on the Shanghai B-share price discount than on the Shenzhen B-share price discount. These results are consistent with the argument of dierential de-mand elasticity.
Other factors like bond supply, share supply, and liquidity also have explanatory power, though of less importance. Interestingly, return vola-tility has explanatory power to the discount phenomenon. Although this seems to suggest that the speculative fever of Chinese investors plays a role, we are not sure as we do not have further testing variables to con®rm the result.
discount later. The premium at the early stage might have been due to novelty in generating favorable investor sentiment, as mentioned in De Long and Shleifer (1992). But the subsequent discount might well have been due to poor information disclosure and low accounting standard. When the novelty was gone and when foreign investors were shocked by unexpected poor perfor-mance of the ®rms after a year or so, they began to realize that they were not getting any better information on the H-share companies than on the B-share companies. They began losing their faith and interest in H-shares. That might have been the reason why the H-share discount has deepened through time and converged with the B-share discount. On the other hand, this is why we believe that foreign investors are important to the B-share discount phe-nomenon.
Another possible reason is the dierence in expectations of ®rmsÕ growth rates between Chinese investors and foreign investors, as mentioned at the beginning of the paper. If foreign investors are more pessimistic than Chinese investors about Chinese ®rms, they would pay a lower price than Chinese in-vestors would. Although it is dicult to test, anecdotal evidences suggest that it might indeed be the case. For instance, ChinaÕs ``ocial'' GDP growth forecast ®gures, as given by the State Statistical Bureau, are viewed by many as in¯ated. As the China Business Reviews says, ``China's GDP has grown at an average real rate of 9% per year since economic reforms began in 1978, SSB reports. Such ®gures are impressive at ®rst glance, but most China economists are quick to point out that the ocial PRC real growth rate ®gures overstate the actual rate of growth of the economy, because SSB underestimates the in¯ation rate in these calculations.''17 Of course, what we are interested in is the dierent expectations of individual ®rm growth, not national income growth. Yet, the consistently higher ocial estimation of ChinaÕs economic growth rate may be the basis for Chinese investors to have higher expectations for individual ®rmsÕ
growth rates. This in turn can partly explain why A-share prices are higher than B-share prices.
All these possibilities can be important, yet they are dicult to measure. Perhaps after a few years of further reforms and development in China, we will be in a better position to measure these changes and be able to examine their possible impacts on the B-share discount phenomenon in a more direct way and with greater success.
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