Investigation on overvaluation of shares in China

• Main Authors: Choon, Alan Zhen Yu, Liang, Shihong, Xu, Boxiao
• Other Authors: Feng Qu
• Format: Final Year Project
• Language: English
• Published: 2018
• Subjects: DRNTU::Social sciences::Economic development::China
• Online Access: http://hdl.handle.net/10356/76107
• Institution: Nanyang Technological University

This paper investigated the potential overvaluation of A shares in China through different pricing between A and H shares (A-H premium) of cross-listed firms in China. Plots and summary statistics show persistent and significant A-H premium which varies cross-industry and over time. For instance, in 2002, the average A-H premium of all 20 cross-listed firms at that time hits 400% of H share prices, while more recent ones fluctuate around 30%. Average A-H premium for diversified financials industry is around 40% recently, while it is only 10% for banks. Existing literature has explained the over-time difference using macro factors affecting all firms, such as asymmetric information and speculative sentiments. However, the huge cross-industry and cross-firm differences still needs exploring. Hence, this study provides a fresh perspective, by measuring firm’s exposure to capital control using overseas revenue ratio, and then explores its contribution to overvaluation. Specifically, we created a panel data of A and H shares cross-listed in China and Hong Kong across 2004 to 2017 and analysed the data with 3 different regression methods consisting Fixed-effect regression, Random-effect Regression and Fixed-effect regression with interaction effect. Our results reinforce the notion of overvaluation of A shares, and also find out that companies with channels to bypass capital control tend to have lower A-H premium and Price-to-Earnings ratio (PE ratio) gap. As an alternative to price premium, PE ratio as a measure of overvaluation also shows consistent results. This study suggests how much the valuation of A shares will be influenced as China gradually opens up its financial market, when exposure to capital control reduces. It also has significant implications in policy decisions for governments of overseas countries such as Singapore whose assets act as substitutes to equity investments in China.