Puzzles in the Chinese Stock Market

41 Pages Posted: 17 Sep 1998

See all articles by John G. Fernald

John G. Fernald

Federal Reserve Bank of San Francisco

John H. Rogers

Board of Governors of the Federal Reserve System - Trade and Financial Studies Section

Date Written: November 2000


Many companies on China's stock markets have separate, restricted classes of shares for domestic residents and foreigners. These shares are identical other than who can own them, but foreigners pay only about one-quarter the price paid by domestic residents. We show that plausible differences--about 4 percentage-points--in expected rates of return by foreign and domestic investors can account for the generally higher level and volatility of prices for domestic shares relative to foreign shares. We attribute low Chinese expected returns to the limited alternative investments available in China. We then explore the extent to which various company characteristics can explain cross-company differences in the relative price paid by foreigners. For example, foreigners pay a lower relative price for companies with a higher proportion owned by the state--reflecting, surprisingly, a higher absolute price paid by both foreigners and domestic residents. Several puzzles remain. For example, we are unable to explain why Chinese investors in Shanghai paid lower prices in 1994 and 1995 for companies with their foreign listings in Hong Kong rather than Shanghai.

JEL Classification: E44, F32, F36, G12

Suggested Citation

Fernald, John G. and Rogers, John H., Puzzles in the Chinese Stock Market (November 2000). FRB International Finance Discussion Paper No. 619; FRB Chicago Working Paper No. 2000-13. Available at SSRN: https://ssrn.com/abstract=124268 or http://dx.doi.org/10.2139/ssrn.124268

John G. Fernald (Contact Author)

Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States
415-974-2135 (Phone)

HOME PAGE: http://www.frbsf.org/economics/economists/jfernald.html

John H. Rogers

Board of Governors of the Federal Reserve System - Trade and Financial Studies Section ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States
202-452-2873 (Phone)
202-736-5638 (Fax)

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