On the Chinese B-share price discount puzzle: Some new evidence

Since February 2001, the Chinese Securities Regulatory Commission allowed domestic trade in foreign-currency denominated shares (B-shares) whose trade was originally restricted to foreign investors. We investigate possible effects of lifting the ownership restriction on the B-share discounts and explore why the discount persists even after removing the restriction. The discount is the percentage by which the B-shares are priced less than the otherwise identical Chinese-currency denominated shares held by domestic investors (A-shares). The results suggest that prices in the B- and A-share markets are closely linked over the long-run and that this equilibrium relationship strengthened in the post-lifting period. Our results further rule out information asymmetry as a reason for the continuation of the discount and support instead the importance of firm size and relative supply of the B-shares.