Risk-Return Dynamics of the Chinese Stock Market: A Comparison between A, B and H Shares

Sunil K Mohanty,Mohan Nandha,Abdulal Abu Khashabah,Abdullah Asiri

doi:10.5539/ibr.v8n8p79

Abstract

This study compares the risk-return characteristics of the Chinese A shares with that of B and H shares over the period from January 1995 to June 2012. On average, B and H shares 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 B or H shares may be nearing the end. This finding appears to be a consequence of investment schemes which allow domestic and foreign investors to cross each other’s territories after opening up of the Chinese market to foreign investors. Second, there is some evidence of exchange rate advantage for foreign investors, even though it is negligible. The results of our study suggest that any additional benefit generated by slight (average annual) appreciation of Yuan against the dollar is offset by an increase in volatility of returns measured in the US dollar.

Highlights

Record economic growth and enormous market size of China have encouraged many multinational corporations and institutional investors to invest billions of dollars in China directly and indirectly
Higher standard deviation of returns measured in the US dollar may indicate extra risk contributed by the exchange rate volatility
Chinese stocks are divided into different classes like A shares, B shares and H shares and they trade in different currencies

Summary

Introduction

Record economic growth and enormous market size of China have encouraged many multinational corporations and institutional investors to invest billions of dollars in China directly and indirectly. These foreign investments have generated millions of jobs for the Chinese workers. Many workers in resource rich countries like Australia, Brazil, Canada and South Africa have their jobs linked to the Chinese market as their employers‟ depend on Chinese demand for foreign resources Other people have their wealth and retirement tied to the Chinese stock market through investment in Chinese stocks. A shares listed on the mainland stock exchanges are priced in the Chinese Yuan and are mainly for investment by domestic investors. Guo argues that the primary reasons for these price differences may be due to restrictions on capital flows and different investor bases for different share classes

Objectives

Findings

Discussion

Conclusion