Location of trade, ownership restrictions, and market illiquidity: Examining Chinese A- and H-shares

We examine Chinese companies that issue both A-shares in mainland China and H-shares in Hong Kong. A-shares are restricted to mainland Chinese investors, while H-shares are available to Hong Kong and international investors. We find that H-shares exhibit significant exposure to Hong Kong market factors and behave more like Hong Kong stocks than mainland Chinese stocks. However, H-shares retain significant exposure to their domestic market and therefore provide foreign investors with diversification opportunities. We find a large time-varying H-share price discount relative to A-shares, and this discount is highly correlated with domestic and foreign market factors and relative market illiquidity.