A Risk-Return Analysis of the Chinese Stock Market

Abstract

This study examines the risk-return characteristics of the Chinese A and H B-shares from domestic and foreign investors’ perspective over the period January 1995 to June 2012. On average, H B-shares appear to offer a better risk-adjusted return irrespective of whether the returns are measured in the Chinese Yuan (domestic perspective) or in the US dollar (foreign perspective) terms. However, a ‘timeline’ analysis indicates that the relative advantage arising from investment in H B-shares may be nearing the end. This finding appears to be a consequence of investment schemes (such as opening of B shares to domestic investors, QFIIs and QDIIs) which allow domestic and foreign investors to cross each other’s territories specified at the begging of the opening up of the Chinese market to foreign investors. Second, there is some evidence of exchange rate advantage for foreign investors, but almost negligible. This finding may indicate that any extra benefit generated by slight (average annual) appreciation of Yuan against the dollar is offset by extra volatility of returns measured in the US dollar.