Effect of Shanghai-Hong Kong Stock Connect Scheme on The AH Premium

Abstract

The Shanghai-Hong Kong Stock Connect scheme was announced by Premier Li Keqiang on the 10th of April 2014, and was subsequently launched on the 17th of November in the same year. The scheme allows investors in the Mainland Chinese market and the Hong Kong market to trade shares on the other market through their local brokers and clearinghouses, essentially a retail investor-friendly version of the QDII and QFII program. By theory, the scheme could be seen as a form of financial integration and thus be able to eliminate or at least lower the price disparity between cross-listed companies on the Mainland Chinese A-Share market and the Hong Kong H-Share market. Contrarily however, the price discrepancy that existed between the cross-listed A- and H-Share stocks, or otherwise, the AH Premium, actually increased. This paper therefore seeks to find out whether or not if The SH-HK Stock Connect scheme actually had an effect on the AH Premium, and if so, whether if it was successful in reducing it. The results from 68 cross-listed companies throughout a period of 3 years from December 2014 to December 2017 showed that the scheme did in fact have a negative causality with the AH Premium.