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

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    Reform in China's 'B' share markets and theshrinking A/B share price differentialPaul McGuinnessPublished online: 06 Oct 2010.

    To cite this article: Paul McGuinness (2002) Reform in China's 'B' share markets and the shrinking A/B share pricedifferential, Applied Economics Letters, 9:11, 705-709, DOI: 10.1080/13504850210124572

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  • Reform in Chinas `B share markets and

    the shrinking A/B share price di erential


    Department of Finance, Chinese University of Hong Kong, Shatin, New Territories,Hong KongE-mail: k

    The use of capital controls in mainland China has meant that shares in listed PRCstate enterprises traded in either Shenzhen or Shanghai have been broadlyseparated into `A and `B share categories. `A shares are traded in ChineseRenMinBi 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 e ect from 28 February 2001, have altered this picture,however, with certain parties from the PRC mainland now able to participate inthe `B markets. The opening of the `B market has resulted in a rapid increase in `Bprices. The e ects are analysed in this paper for 40 companies with concurrent `Aand `B share listings in Shanghai. Prior to the reforms, the `A shares traded at pricesthat were, on average, over four times the level on corresponding `B shares. By themiddle of June 2001, this multiple had been squeezed substantially. This short paperexamines the relative changes to the `A/`B share price di erential and nds that `Bprice movement are related to the absolute price levels in `A and `B share pricesprior to the reforms. The results are consistent with a retail market in which a`trading range obtains for prices in the two market sectors.


    This article examines recent reforms to the `B share mar-

    kets in mainland China and the impact of these reforms on

    the relative pricing of shares in companies with both `A

    and `B listings. Before outlining these reforms, it is import-

    ant to realize that shares in the typical PRC state-owned

    enterprise are separated into negotiable and non-negotiableblocks of scrip. The non-negotiable block typically domi-

    nates and is controlled either directly or indirectly by the

    PRC State. This block of scrip often accounts for between

    60 and 70% of outstanding equity. The remaining, negoti-

    able stock can be traded in one of three non-fungible

    forms: as tradable `A, `B or `H stock. Certain combina-

    tions of the tradable categories are also permissible for any

    given company, with `A and `B listings and `A and `H

    listings admissible and common in a number of listed state


    `H shares represent stock listed on exchanges outside the

    PRC mainland, with Hong Kong and the New York StockExchange the preferred venues.3 `A and `B shares in con-

    trast can be listed in either Shanghai or Shenzhen where, in

    the case of `A shares, trades are conducted solely in

    RenMinBi and limited to parties with Mainland residency.

    `B shares in comparison trade in US$, if listed in Shanghai,

    or in HK$, if listed in Shenzhen, and, prior to reforms

    Applied Economics Letters ISSN 13504851 print/ISSN 14664291 online # 2002 Taylor & Francis Ltd 10.1080/1350485021012457 2

    Applied Economics Letters, 2002, 9, 705709


    1 See McGuinness et al. (2000) for more details of these categories.2As of August 2000, 82 companies had concurrent `A and `B share listings (with 41 in Shanghai and 41 in Shenzhen) and a further 19 had concurrent `Aand `H listings (see McGuinness et al., 2000: p. 8).3 Securities in the latter are in the form of ADR, with underlying `H shares held by a custodian bank on behalf of the benecial ADR owner.




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  • implemented with e ect from 28 February 2001, were

    intended to be the legal preserve of parties emanatingfrom outside the PRC Mainland.The `B share reforms, announced on 19 February, 2001

    and implemented with e ect from 28 February, 2001 (withthe `B markets suspended between these two dates),

    a orded indigenous mainland individual investors, withrecognized foreign exchange accounts opened prior to theannouncement, the opportunity to trade `B shares.4 Prior

    to the reforms, the `B shares were relatively illiquid andwere typically priced at a discount of 70% or more to `Ashares, even within the same company.5 The opening of the`B markets quickly changed this with the di erential being

    squeezed by more than half between March and June 2001.The e ects have not been unduly surprising as the price

    `premiums on `A shares have typically been credited tothe huge amounts of savings in China which are essentially`locked into the Mainland by virtue of capital controls.6;7

    Allowing some of these savings to nd an alternativeinvestment route the local `B share market has, there-fore, precipitated a sharp change in the `A and `B share

    price di erential. Table 1 illustrates the e ect of thesechanges, for 40 companies with concurrent `A and `Bshare listings on the Shanghai Stock Exchange, for various

    dates in 2001. In addition to the remarkable shrinkage inthe `A/`B price ratio, the Shanghai `B Indexs perform-

    ance since the reform has been remarkable: the Index roseby 53% alone within the rst week of post-reform trading.8

    As of mid June 2001, the market had risen by an astound-

    ing 143% from its 31 January 2001 level.


    Particulars of the companies involved in the analysis inTable 1 are set out in the Appendix. The closing pricesshown are adjusted in the case of Heilongjiang Electricand Jinzhou Harbour Co. for bonus issues (stock divi-dends), occurring between 1 January and 14 June 2001.None of the 40 companies experienced stock splits or rightsissues during the period however. Adjustments to the `Aand `B prices for dividends were not made, essentiallybecause such entitlements apply equally to a given com-panys `A and `B shareholders; with the caveat that divi-dends are paid in RenMinBi on `A shares and in US$ orHK$ on `B shares. As dividend yields were also generallyquite low, the e ects on individual `A and `B prices andthe `A/`B price ratio were minimal. All prices and checksfor bonus issues, splits and rights issues were determinedusing Datastream.


    The interesting issue here is how locally-held foreignexchange funds have spread across the market. Using the40 companies with concurrent `A and `B share listingsdescribed earlier, funds appear to have owed into the`lowest priced stocks rst and, as these have becomemore expensive, possibly migrated across the `B share

    706 P. McGuinness

    4 For useful descriptions of the `B share reforms see Chinaonline (20 February 2001 and 22 February 2001).5 See McGuinness et al. (2000) for PE ratio comparisons as of August 2000.6 For data prior to the reforms, Sun and Tong (2000) analyse the `A and `B market segmentation in terms of a `di erential demand elasticity argument,where increases in the supply of `B shares (relative to `A) enlarge the `A share `premium. This is predicated on a more inelastic demand curve for `Bshares (due to `foreign investors having greater investment substitutes). Sun and Tong