Reform in China's 'B' share markets and the shrinking A/B share price differential

Abstract

The use of capital controls in mainland China has meant that shares in listed PRC state enterprises - traded in either Shenzhen or Shanghai - have been broadly separated into ‘A’ and ‘B’ share categories. ‘A’ shares are traded in Chinese RenMinBi and are restricted to trades between indigenous investor concerns, whilst ‘B’ shares trade in US$ in Shanghai and HK$ in Shenzhen and have, until recently, been the legal preserve of investors emanating from outside the PRC mainland. Reforms, instituted with effect from 28 February 2001, have altered this picture, however, with certain parties from the PRC mainland now able to participate in the ‘B’ markets. The opening of the ‘B’ market has resulted in a rapid increase in ‘B’ prices. The effects are analysed in this paper for 40 companies with concurrent ‘A’ and ‘B’ share listings in Shanghai. Prior to the reforms, the ‘A’ shares traded at prices that were, on average, over four times the level on corresponding ‘B’ shares. By the middle of June 2001, this multiple had been squeezed substantially. This short paper examines the relative changes to the ‘A’/‘B’ share price differential and finds that ‘B’ price movement are related to the absolute price levels in ‘A’ and ‘B’ share prices prior to the reforms. The results are consistent with a retail market in which a ‘trading range’ obtains for prices in the two market sectors.