Equity Valuation in Mainland China and Hong Kong: The Chinese A-H Share Premium

31 Pages Posted: 22 Aug 2007 Last revised: 8 Aug 2022

Date Written: August 1, 2005

Abstract

This working paper was written by Zhijun Zhao (Chinese Academy of Social Sciences), Yue Ma (Lingnan University and Xiamen University) and Yuhui Liu (Chinese Academy of Social Sciences).

This paper studies the links between fundamental value and market price of the companies listed in both mainland A-share and Hong Kong H-share markets. As the valuation model has been inadequately applied in the literature, this study theoretically clarifies that the dividends discount model (DDM) and it derivatives are suitable for firms, but not for general consumers and investors, to evaluate equity fundamental values. Thus, using DDM and its derivatives to determine the market price of equity, which has been done in many other studies, is problematic. This paper also empirically studies how accounting data determines fundamental values of equities using a pooled-data vector autoregressive method. It indicates that although fundamental value can be a benchmark for investors to price equity, prices of equity may deviate from fundamental values substantially for a long time due to differences in preference and the extent of risk aversion between A-shares and H-shares. Correlation between equity price and its fundamental value for H-shares is larger than the correlation for A-shares. This paper also explains why there has been a big price gaps between A-shares and H-shares with exactly the same yields rights. The estimates of fundamental value for each company help investors make rational investment decisions. It suggests that, in the long run, healthy development of Chinese securities markets will depend on the progress of privatisation and marketisation of the Chinese economy. Measures such as the Qualified Foreign Institutional Investors (QFII) and Qualified Domestic Institutional Investors (QDII) programmes should be adopted to improve the efficiency of financial resources utilisation in mainland China, despite the short-run pressure that may put on A-share markets.

Keywords: A-H share premium, China, Hong Kong

JEL Classification: G10, G12, G18.

Suggested Citation

Submitter, Hong Kong Institute for Monetary and Financial Research, Equity Valuation in Mainland China and Hong Kong: The Chinese A-H Share Premium (August 1, 2005). Hong Kong Institute for Monetary and Financial Research (HKIMR) Research Paper WP No. 14/2005, Available at SSRN: https://ssrn.com/abstract=1008778 or http://dx.doi.org/10.2139/ssrn.1008778

Hong Kong Institute for Monetary and Financial Research Submitter (Contact Author)

Hong Kong Institute for Monetary and Financial Research ( email )

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