Abstract: This paper explores the micro-, meso- and macro-level determinants of the AH and A-ADR premiums using share price data from cross-listed companies over 2002-2020. During the period, the 9 pairs of shares listed in all three markets averaged an A-ADR premium around 30% and AH premium of 34%, while the weighted average AH premium of 116 pairs was 35%. Both types of premiums surged after the introduction of Shanghai–Hong Kong Stock Connect (SH Connect) in November 2014. Our empirical analyses find that micro factors weigh much more in explaining both types of premiums, and dividend ratio and financial openness are the two most important determinants. Besides, individual share liquidity is important for A-ADR premium, and market sentiment has a significant impact on AH premium. To test the policy impacts of foreign exchange rate reform and financial openness, we construct a two-stage two-country model, and prove that in certain scenarios, both can help to reduce price differences. The results also hold when we simulate the impacts of these two policy changes on premiums in a more generalized scenario numerically. Our empirical analyses also confirm the results of the model. The findings have multiple policy implications for promoting the price discovery capacity of A-shares and the resource allocation of capital markets in China.
Full text: AH and A-ADR Premiums: On Policy Impacts of Foreign Exchange Rate Reform and Financial Openness
