Cross-Market Trading in China’s Large State-Owned Commercial Banks

Abstract

This paper examines the differential between the share prices of China’s large state-owned commercial banks traded in Shanghai vs. prices observed in Hong Kong. We find a significant role for investor sentiment, as reflected in relative price-earnings ratios, in explaining these price differentials for all four banks. The share price in Shanghai tends to move ahead of the share price in Hong Kong when rising local sentiment makes investors in Shanghai willing to pay more for the same predicted earnings. We also identify co-movement in relative bank price-earnings ratios across the two markets plus some co-determination in the price differentials.