Foreign ownership restrictions and market segmentation in China's stock markets

Abstract

We study market segmentation in China's stock markets, in which local firms issue two classes of shares: class A shares available only to Chinese citizens and class B shares available only to foreign citizens. Significant stock price discounts are documented for class B shares. We find that the price difference is primarily due to illiquid B-share markets. Relatively illiquid B-share stocks have a higher expected return and are priced lower to compensate investors for increased trading costs. However, between the two classes of shares, B-share prices tend to move more closely with market fundamentals than do A-share prices. Therefore, we find A-share premiums rather than B-share discounts in China's markets.