B-share Market Research Articles

Are Chinese B-shares dead? An analysis of price limits on AB-shares on the Shanghai and Shenzhen Stock Exchanges

Firms listed on the Shanghai and Shenzhen Stock Exchanges can simultaneously issue two types of shares: A and B-shares, subject to the same price limits. After July 2003, both Chinese citizens and Qualified Foreign Institutional Investors (QFIIs) were able to trade both A and B-shares in China. Following this regulatory change, some media posts predict that B-share markets will cease to exist in the future. However, are B-shares really dead? Are there no differences at all between these two markets today? In this paper, we will try to answer this question by analysing these two markets with the perspective of price limit efficacy. The rationale behind price limits is to provide investors with a cooling-off period to counter noise trading and alleviate market panic. By applying a truncated-GARCH model that explicitly incorporates the truncation in the distribution of returns that is induced by price limits, we investigate whether price limits have the same effects on price behaviour and volatility on different types of share. In general, A and B-shares enjoy a quite similar pattern in regards to volatility spillover. However, B-shares tend to have more upper price reversal and lower price continuation. This suggests price limits work more efficiently in the B-share market.

Interaction influence of trading rules on the quality of stock markets: the price limit rule and day trading rule from the Shanghai and Shenzhen Stock exchanges

ABSTRACT The effect of each trading rule is not completely independent. From the perspective of market differentiation, we establish the linear simultaneous equation model to study the comprehensive influence of the price limit rule and the day trading rule on the quality of China’s stock market and investigate whether it is a synergistic or an anti-synergistic effect. To eliminate the influence of other factors before or after the reform of the trading rules, we establish the difference-in-difference simultaneous equation model for further testing. Results show that when the stock market is divided into the Shanghai A-share market, the Shanghai B-share market, the Shenzhen A-share market, and the Shenzhen B-share market, the simultaneous implementation of the price limit rule and T + 1 trading rule significantly reduces the liquidity and market efficiency of the stock market, significantly increases the volatility of markets, and does harm to the market quality. The interaction effect further aggravates the adverse impact of a single trading rule on the liquidity and market efficiency of the stock market, and weakens the beneficial impact of implementing a single trading rule to stabilize the market. The interaction effect has an anti-synergistic effect, and the results are robust.

An Empirical Analysis of the Impact of Exchange Rates on Stock Prices

With the deepening of economic openness, the domestic capital market is increasingly linked to the foreign exchange market, and changes in the exchange rate of a country's currency are often accompanied by significant fluctuations in the level of stock prices. This paper selects the panel data of the stock prices of different listed companies and the exchange rate of RMB to SDR from the first quarter of 2017 to the fourth quarter of 2020 to conduct regression analysis and robustness test. The results show that there is a significant negative relationship between exchange rate (under the direct markup method) and stock prices. Compared with stocks with lower stock prices and B shares, stocks with higher stock prices and A shares are more affected by exchange rate changes. Therefore, China should be cautious in the process of promoting capital account opening and deregulation of exchange rate, strengthen the management of fluctuations in the foreign exchange and stock markets to prevent stock market bubbles, and promote the reform of the B-share market to improve the efficiency of corporate financing and make China's financial market more complete.

The Influence of the Economic Variables on the Chinese B-Share Markets

This paper analyzed how economic variables affect the Chinese B-share market. For this purpose, we investigated the monthly data of major economic variables (consumer price index, imports and exports volume, money supply, real estate index and retail sales volume) and B-share price index of Shanghai and Shenzhen Exchange of China from 2009 to 2019 by employing the multivariate VAR-GARCH-BEKK model. We measured the return spillover effect between Chinese major economic variables and B-share market index from the estimation results of VAR conditional mean equation, and volatility spillover effect between the economic variables and B-share index from the estimation results of GARCH-BEKK conditional variance equation. From these results, we investigated whether there is any difference between the Shanghai and Shenzhen Exchange markets. The main findings are as follows. First, the return spillover effect does not exist in both markets except the Consumer Price Index (CPI). Second, there is the volatility spillover effect between economic variables and Shenzhen B-share market, implying that the volatility spillover effect is more important than the return spillover effect in the Chinese B-share market. Third, compared with Shanghai, the change of the Shenzhen stock market is more affected by the change of economic variables. These findings have some important policy implications. First, investors in Chinese stock market need to make good use of the information inherent in China’s economic changes to increase returns and reduce investment risks. Second, the investors should pay close attention to the overall trends of the Chinese economy and the global economy, not just to the trends of the Chinese market.

An Anecdote of Investor Anxiety and Momentum in China

We show the effect of investor anxiety on momentum in the Chinese stock market. In this market dominated by retail investors, we examine the momentum profits in 900 types of daily testing periods. We find prevalent price reversals in the long formation and holding periods in the Chinese A-share market. Compared to Goyal and Wahal (2015), Wang and Xie (2010), and Kang et al. (2002) who found no momentum, our novel finding from a daily basis is that the A-share market presents price momentum within the short formation and holding periods. We first test the momentum profits under different strengths of anxiety in the A-share market. The stocks held by the least anxious investors elicit the strongest price momentum, whereas the stocks held by the most anxious investors encounter much weaker price momentum in the A-share market. According to our empirical outcomes, the A-share market overall exhibits higher anxiety and weaker momentum, whereas the B-share market embodies milder anxiety and stronger momentum. From the results of single market and cross-market comparisons, the intrinsic anxiety of retail investors is an essential factor stimulating the Chinese stock market to be prone to price reversals.

Herding behaviour of Chinese A- and B-share markets

Purpose The purpose of this paper is to examine the evidence of herding phenomenon, spill-over effects related to herding and whether herding is driven by fundamentals or non-fundamentals for various sub-periods and sub-samples. Design/methodology/approach The cross-sectional absolute deviation model is applied to China’s A- and B-share markets in combination with fundamental information. Findings Herding is prevalent on both A- and B-share markets. In detail, investors on A-share market herd for small and growth stock portfolios irrespective of market states while they only herd for large or value stocks in down market, therefore leading the whole herding behaviour to be pronounced in down market. Comparatively, on B-share market, herding is robust for various investment styles (small or large, value or growth) or market situations. Additionally, spill-over effects related to herding do not exist no matter from A-shares to B-shares or from B-shares to A-shares. Moreover, investors on B-share markets tend to herd as the response to non-fundamental information more frequently during financial crisis. Originality/value Investors on A- and B-share markets tend to herd as the response to non-fundamental information more frequently during financial crisis. Analysing the herding behaviours could be helpful in controlling the financial risk.

Trader differences in Shanghai’s A-share and B-share markets: Effects on interaction with the Shanghai housing market

This study analyzes the relationship between the second-hand house price index of Shanghai and Shanghai stock market indices distinguishing between the A-share market, in which Chinese investors predominate, and the B-share market, in which foreign investors predominate. Monthly data for the period April 2003 to June 2018 are analyzed using VAR and GARCH methods. The A-share market shows little covariance with the housing market, whereas the B-share market generally shows a negative covariance, indicating the potential for B-shares to provide risk diversification for Shanghai house owners. Using VAR estimation, a positive shock to the housing market is found to have a negative effect on the A-share market contrary to a positive such credit-price effect between stocks and house prices established for developed countries, perhaps due to a crowding-out of rising house prices on share purchase. Using GARCH estimation, however, the negative credit-price effect is discerned to apply only for negative house price shocks, suggesting falling housing prices allow more funds to be diverted to the share market. While the A-share market shows causality in only one direction from house prices to share prices, causality between the B-share and housing markets is two-way. This is consistent with the less restricted B-share market affording better information transmission.

Why investors do not buy cheaper securities: Evidence from a natural experiment

Abstract We examine the trading behavior of Chinese domestic investors after they were given access to the B-share market in 2001. Surprisingly, we find that only 2% of investors began buying B shares. Even among these 2%, investors were less likely to buy B shares if they had more experience in the A-share market, and vice-versa. Thus, prior market experience limits the extent to which investors respond to A/B-share premiums and liquidity and lowers their performance. Our findings cannot be explained by government intervention, investor heterogeneity, foreign currency constraint, A/B-share liquidity or speculation differentials, or information advantage.

Investor Composition and Stock Return Patterns: A Study of Momentum in the Chinese A- and B-Shares Markets

Listed Chinese companies can issue A-shares that are held mainly by domestic investors and B-shares that are held mainly by foreign investors. Although these twin shares have identical cash flow rights and are traded in the same location, A-shares are almost always priced higher than B-shares. A-shares also exhibit substantially higher turnover, suggesting that the clientele holding these shares trade more actively than the B-share investors do. To describe the relation between the returns in these markets we provide a descriptive model where the A-share market is in some sense more and in some sense less efficient than the B-share market. Because insiders trade in the A-share market, prices capture information faster than that in the B-share market. However, A-share market participants also trade on noise. We also assume that all market participants are overconfident about their prior beliefs, and thus underreact to fundamental information and ignore information embedded in stock prices. The model generates momentum for B-shares and reversals for A-shares as well as cross-predictability, i.e., A-share (B-share) returns predict future B-share (A-share) returns. We provide empirical evidence that is consistent with all of these predictions.

US Economic Policy Uncertainty and Co-Movements between Chinese and US Stock Markets

This paper investigates the impact of innovations in US economic policy uncertainty on the co-movements of, respectively, the Shanghai A-share, the Shenzhen A-share, the Shanghai B-share and the Shenzhen B-share market, with the US stock market. We show that it is absolute changes in the US economic policy uncertainty index that have a negative impact on the co-movements. The finding is robust to the asymmetric effects of non-policy-uncertainty shocks, to a break in the correlation structure, and to the four different Chinese stock markets investigated. Our results provide the first evidence regarding how stock market correlations are driven by policy-related uncertainty shocks in the international context.

Foreign ownership and auditor choice

We take advantage of the unique institutional background of the B-share stock market in China to explore the impact of foreign investors on auditor choice. Our results show that the percentage of B-share firms audited by Big 4 auditors has decreased with both economic and statistical significance since the segmented B-share market was opened to domestic investors in 2001. We find that the negative effect of opening the B-share market on demand for high audit quality is more pronounced for firms with greater decreases in foreign ownership and for firms with strong incentives to be opaque, such as those in a weak institutional environment, firms with more “other receivables,” firms with more related-party transactions, and firms with political connections. Additional analysis shows that our results are not driven by the concurrent decline in capital-raising activities in the B-share market.

Price Spillover and Dynamic Correlation in the Shanghai A- and B-Share Stock Markets: Evidence from the B-Share’s Opening to Chinese Citizens

This study adopts a bivariate EGARCH model, augmented with correlation index function, to examine the bilateral relationships between the Shanghai A- and B-share stock markets. Daily closing A- and B- share index prices, as well as S&P 500 index prices are used and they span from January 2, 1997 through December 30, 2005, a total of 2170 observations. A mean spillover from the B- to A-share market was found in the post-opening period and not the other way around. In addition, the US market plays an important role of information transmission to the B-share market. Moreover, a change in responsiveness of cross-market correlation to information arrivals was also detected after B-share’s opening to Chinese citizens.

Integration versus segmentation in China's stock market: An analysis of time-varying beta risks

This paper assesses whether China's stock market is integrated with the global market during 2000–2010 within the framework of an augmented CAPM. We firstly use Kalman smoothing technique to obtain time-varying global and national systematic risks for the once-restricted A- and unrestricted B-share indices in China's stock exchanges. Then we investigate how these risks are priced while controlling for possible structural changes using the Markov regime-switching technique. We find evidence of partial integration in terms of positively priced global and national systematic risks in most cases. However, the unrestricted Shanghai B-share market is found to be generally segmented from the global market. The degree of integration is therefore not simply a matter of the degree of restriction, confirming that documenting barriers to investment (or the lack of them) is insufficient to prove segmentation (or integration). Given that the domestic systematic risk is still priced, there is scope for international portfolio diversification into China.

Macro fundamentals as a source of stock market volatility in China: A GARCH-MIDAS approach

In order to shed new light on the influence of volume and economic fundamentals on the long-run volatility of the Chinese stock market we follow the methodology introduced by Engle et al. (2009) and Engle and Rangel (2008) to account for the effects of macro fundamentals, and augment it with speculative factors. We show that the Chinese A-share market presented speculative characteristics before WTO entry in late 2001. However, after that date macroeconomic fundamentals and their volatility played an increasing role in the A-share market, especially CPI inflation, at the expense of speculative factors, proxied by volume. The B-share market has shown speculative characteristics since it was opened to domestic investors in 2001. However the disconnect of long-run stock market volatility from real economic activity in China is particularly noteworthy.

Impacts of the Stock Market Liberalization in China: Evidence from the Foreign Institutional Investor Scheme

The aim of this paper is to analyze the influence of the Qualified Foreign Institutional Investors (QFII) scheme announcement on the Chinese A- and B-share markets, using an event study method with the GARCH (Generalized Autoregressive Conditional Heteroskedasticity) process. The results indicate that the announcement of the QFII system did cause a rapid drop in stock prices and trading volumes for both the Shanghai and Shenzhen stock markets. The abnormal returns in the Shanghai A-share market are influenced the most by the QFII scheme and both stock markets experienced a sustained decline in the trading volumes. The results of cross-sectional variation further reveal that the number of board members, the shareholding ratio of block shareholders, the market capitalization of firm equity, and SOEs are all positively related to the abnormal trading activities. It is worth pointing out that stock listings in the overall Shanghai stock market and the both A-share markets exhibit a negative relationship with the abnormal trading behavior, implying that A-share stocks might be overvalued after the opening up of the B-share market.

Information asymmetry, price discovery, and the Chinese B-share discount puzzle

This paper addresses the information asymmetry between Chinese local A-share and foreign B-share markets and its impact on the B-share discount puzzle, contingent upon Chinese stock market liberalization reforms in 2001 and 2002. In contrast with the widespread notion that domestic investors are better informed than foreign investors, this study shows that foreign investors actually possess more value-relevant, firm-specific information in emerging markets, where information transparency and investor protection rights are relatively weak. As such, the observed B-share discount is not compensation for the informational disadvantage of foreign investors but, rather, the result of a downward price correction (toward the fundamental values) once more firm-specific information is capitalized by sophisticated foreign investors in the B-share market. The price correction effect is significant even after controlling for several alternative explanations. Further investigation suggests a mitigated degree of information asymmetry and B-share discount upon market liberalization.

An Empirical Assessment of A-Share IPO Under-Pricing in China

This paper investigates the under-pricing and long-run performance of 230 A-share IPOs issued in the Chinese markets using comparable firm * The authors wish to thank the journal Editor-in-Chief, Professor Kyung Mook Lee, and three anonymous referees for extremely valuable comments. The last author wishes to acknowledge the financial support of a Strategic Research Grant from ECU. ** Professor, Department of International Trade and Business, Kangwon National University, Korea (chsohn@kangwon.ac.kr). *** Associate Professor, Department of Economics, National University of Singapore, Singapore (ecsatsui@nus.edu.sg). **** Assistant Professor of Finance, David Eccles School of Business, University of Utah, USA (feng.zhang@business.utah.edu). ***** (Corresponding author) Associate Professor of Economics, School of Accounting, Finance and Economics, Edith Cowan University, 270 Joondalup Drive, Joondalup, WA 6027, Australia. Tel: +61 8 6304 5266; Fax: +61 8 6304 5271 (zhaoyong. zhang@ecu.edu.au) 26 Seoul Journal of Business multiples. We find that A-share IPOs are severely under-valued by issuers and underwriters at the offer, but over-valued by investors on the listing day. Both contribute to the severe under-pricing of IPOs in China. Our findings are robust across stock exchanges, classification of firms, criteria for choosing matching firms; absence of CSRC regulation and B-share market prices, respectively. The results also show that those over-valued IPOs by investors on the listing day under-perform those under-valued IPOs in the long-run.

Are Chinese Stock Market Cycles Duration Independent?

This paper studies the duration properties of the Chinese stock market cycle. We find evidence for duration dependence in both A-share and B-share markets for whole cycles. The results reject the random-walk hypotheses for both markets. For half cycles, evidence of duration dependence for expansions in the Shanghai A-share market is found. For the Shenzhen B-share market, there is little evidence of duration dependence for half cycles. Although the B-share market is less liquid as compared to the A-share market, the results of this study suggest that the B-share market is more efficient than the A-share market. An important implication is that the quality of market participants plays an important role in the duration property of the Chinese stock market.

Property Rights Protection, Information Acquisition, and Asset Prices: Theory and Evidence

We study comovement of Chinese A and B shares (restricted to foreigners). A-B shares within rms commove surprisingly less than Bshares of di¤erent rms. Investor property rights protection (PRP), and several rms’opaqueness measures, explains these patterns. A reform allowing domestic investors into B-shares increases A-B comovement, specially for rms in low PRP cities. We o¤er a model with segmented markets where foreigners face information acquisition costs. In equilibrium, B-share prices are disconnected from fundamentals, lowering comovement with Ashares. Reducing market segmentation increases informed trading and A-B comovement, the more so for rms with higher initial information costs. JEL codes: G12, G14, K22. Keywords: Property Rights Protection, information acquisition costs, asset prices. We have bene ted from discussions with Robert Battalio, Jason Chen, Mara Faccio, Ravi Jagannathan, Dong Lou, Tim Loughran, Jianfeng Shen, Paul Schultz, David Solomon, Joshua Spizman, and Jianfeng Yu. Seminar participants at Loyola Marymount University, University of Notre Dame, and University of Southern California provided valuable feedbacks. Yongxiang Wang would like to thank CIBER at Marshall School of Business and USC-China Institute for nancial supports. Jianfeng Zhu provided outstanding research assistance. yContact: Elias Albagli, Central Bank of Chile, Research Department, (Email) ealbagli@bcentral.cl, (Tel) 562-26862688. Pengjie Gao, Mendoza College of Business, University of Notre Dame, (Email) pgao@nd.edu, (Tel) 574-631-8048; and Yongxiang Wang, Marshall School of Business, University of Southern California, (Email) Yongxiang.Wang@marshall.usc.edu, (Tel) 213-740-7650. How do legal and economic institutions a¤ect information e¢ ciency and asset prices? In an in‡uential study, Morck, Yeung, and Yu (2000) nd that stocks in the countries with poor property rights protection (PRP) exhibit a higher degree of price comovement. They conjecture that agents from these countries have less incentive to acquire and capitalize rm-speci c information, thus less rm-speci c information di¤uses into asset prices. In the presence of market-wide noise trader risk, higher uncertainty translates into a large price impact of these shocks, thus leading to excess comovement unrelated to fundamentals. In this paper, we theoretically formalize their intuitions and test the predictions from our model using a novel set of identi cations based on the withincountry variations of local city-level PRP in China. China provides a unique setting to test this idea at least for two reasons. First, there are substantial regional variations in property rights protection (PRP) in China. This is in sharp contrast to what one might expect for a relatively authoritarian country such as China. In fact, based on the World Bank’s rm-level survey evidence, Cull and Xu (2005) pointed out that, “...the institutions associated with contract enforcement, in particular the legal system, vary in their e¤ectiveness across regions in a country as vast as China.”1 Second, ninety rms headquarted in di¤rent cities in China have issued both A-shares and B-shares to investors as of December 2008. These two classes of shares have exactly the same voting rights and cash ‡ow rights. The only di¤erence between these two share classes is that B-shares were available only to foreign investors before February 19, 2001, whereas A-shares are available to domestic investors throughout the sample period.2 In the absence of market frictions, and under investor’s full rationality, classical theories predict that Aand B-shares should move in lockstep, and thus have return correlation close to one. It turns out that they do not. We nd a surprisingly low price comovement between A-shares and B-shares issued by the same rm. In fact, the typical return correlation between Aand B-shares issued by the same rm is even lower than the average B-share return correlation beCull and Xu (2005) provide some vivid contrasts. For instance, managers of private rms from Hangzhou resolve 21% of their disputes via the court system, yet the percentage is merely 0.1% for Dalian. Respondents report that business in Chongqing is twice as likely as in Wenzhou to uphold contract and property rights protection. The regional variations in PRP arise for a number of reasons, including the inter-judiciary competition that can result from the scal decentralization and capital mobility (Qian and Roland, 1998). Allen, Qian, and Qian (2005) discuss the roles of local government in during China’s economic reform, and contrast them to other transitional economies. After February 19, 2001, domestic investors are allowed to invest and trade in B-shares using their personal funds from their foreign currency saving accounts (i.e., “2001 B-share market reform”).

An empirical analysis of the volatility spillover effect between primary stock markets abroad and China

This paper tests the volatility spillovers between the Shanghai market and the main developed stock markets abroad, namely New York, Tokyo, London, and Frankfurt, as well as between the Shanghai market and the emerging stock markets, namely Hong Kong, and Korea. The tests cover the period of 11 July 2005–12 July 2007 and 1 August 2007–10 July 2009, since the financial crisis started from July 2007. To account for asymmetries in the volatility transmission mechanism, we have used the GARCH and EGARCH model. The main findings are as follows. First, the degree of the Leverage Effect of the Shanghai market changes in the opposite direction from most of the other sample markets after the financial crisis began in July 2007. This change implies that investors in the Shanghai markets began to pay close attention to bad news. Secondly, reciprocal spillovers exist for some market pairs before the crisis, as the Shanghai A-share market has unidirectional influence on the emerging markets. After the onset of the financial crisis, the stock markets in developed countries have bidirectional influences on each other. The financial crisis brings the developed markets closer together than before, but they do not receive volatility spillover from the Shanghai A-share market. The financial crisis also influences the Asian emerging markets so as to decrease the volatility transmission that comes from the Shanghai A-share market. The Chinese mainland market is still not a vital security market in the world, although it has become the third largest one. Thirdly, the risk-precautionary role of the Shanghai B-share market is not as significant as expected.