AH Premium and Short Sale Constraints

Abstract

This year, the government of China approved the launch of index futures, margin trading, and short selling of stocks. The trial program for short selling rolled out with 90 stocks in the program as of March 31, 2010. In this paper, we explore the effect of the relaxation of short sale constraints on AH premium (the price differential between the domestic listed A-shares and the Hong Kong listed H-shares). We examine the AH premium movements of the group of dual-listed Chinese shares that are permitted to short, versus the group not permitted to short, both before and after the launch of the new short selling program. We found that the two groups of stocks traded on a different AH premium range and exhibited drastically different risk characteristics. Further analysis of the correlation of AH premium of the two groups with shorting demand in the China A-share market suggests that the relaxation of short sale constraints could potentially be playing a role in lowering AH premium.