US ADR and Hong Kong H-share discounts of Shanghai-listed firms

This paper examines the differential between the share prices of Chinese securities traded on their home market of Shanghai versus prices observed offshore in New York and Hong Kong. The discounts attached to Chinese securities, whether trading as ADRs on the NYSE or as H-shares on the Hong Kong market, appear to have been significantly influenced by changes in both exchange rate expectations and investor sentiment during 1998-2006. Expected exchange rate changes alone account for approximately 40% of the total variation in each case. This is combined with large cross-sectional variation, however, reflecting additional significant market-wide and company-specific sentiment effects.