Capturing the Chinese A-Shares and H-Shares Price Anomaly

With the recent revisions of the Qualified Foreign Institutional Investor (QFII) and Renminbi Qualified Foreign Institutional Investor (RQFII) programs, together with the introduction of the Stock Connect program, the mutual accessibility of the Chinese onshore and offshore equity markets is expected to be enhanced. We examine the characteristics of the A- and H-shares price differentials using the data for dual-listed companies during the 2006–2015 period. We find that the price differential narrows in the latter part of the sample period, which coincides with the enhancement of mutual access of both markets. We propose an A/H-share selection mechanism to identify the share class with the lower price and form an A/H-share class index. We show that the mechanism can deliver improved index characteristics compared with a market-capitalization-weighted China A-shares benchmark. The results are robust to different choices of parameters in terms of buffer zone and rebalancing frequency.