COINTEGRATION OF CHINESE A AND B SHARES

We study information flows in China's stock markets. By using panel data methods we test for a unit root in the price premium of domestic investors' A shares over foreign investors' B shares, as well as cointegration between the A- and B-share prices on the Shanghai and Shenzhen stock exchanges. We find that the A-share premia are nonstationary, and that the A- and B-share prices are not cointegrated up till January 2001. After February 2001, when domestic investors were allowed to trade B shares, the A-share premia become stationary and the A- and B-share prices cointegrated. One interesting result from the panel data analysis is that most firms' A and B shares are cointegrated, but not all firms'. Cointegration is more likely for firms with a small A-share premium, low ratio of non-tradeable shares, high growth rate and large B-share market capitalisation relative to the A-share market capitalisation. Our findings suggest that the relaxation of the investment restrictions decreased the segmentation between the A- and B-share markets in China.