Risk under "One Country and Two Systems": Evidence from Class A, B and H Shares of Chinese Listed Companies

Yimin Zhang () and Ronald Zhao ()
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Yimin Zhang: Department of Economics and Finance, City University of Hong Kong, China
Ronald Zhao: Department of Accounting and Business Law, Monmouth University, New Jersey, USA

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2003, vol. 06, issue 02, 179-197

Abstract: Chinese listed companies issue Class A, B and H shares to Chinese, foreign and Hong Kong investors, respectively. Entitled to exactly the same rights and obligations, the three classes of shares are, however, traded at significantly different prices. The valuation differential is attributable to the different responses to the country-specific risk related to the emerging Chinese stock market by the three categories of investors. The country risk of China can be decomposed into political risk, exchange rate risk, interest rate risk and market risk. Empirical tests provide strong evidence to support the decomposition model. Compared with Chinese investors of A-shares, foreign investors would require a higher rate of return for B-shares to adjust for the political risk of China, reflecting a differential in the risk premium required on the world capital market. In comparison, the Hong Kong investors, who have greater tolerance of the political risk involved in H-shares as a result of the increasing integration between the Hong Kong and Chinese markets under "one country and two systems", are willing to pay a higher price for H-shares relative to B-shares.

Keywords: China; country risk; Hong Kong; market segmentation (search for similar items in EconPapers)
JEL-codes: G1 G2 G3 (search for similar items in EconPapers)
Date: 2003
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Citations: View citations in EconPapers (6)

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DOI: 10.1142/S0219091503001067

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