Domestic versus Foreign Equity Shares: Which are More Costly to Trade in the Chinese Market?

China, with a fifth of the world’s population, is becoming the world’s second-largest economy. In addition, the Chinese currency (RMB) has started to trade in world markets outside mainland China’s borders. To international investors and global portfolio managers, the publicly traded companies in China may offer a faster growth potential than those in the developed countries. The modern Chinese equity markets, with only about two decades of history, have their unique regulations and structures. Currently, there are more than one thousand publicly traded firms in China, and their stock shares are listed on the Shanghai or the Shenzhen Stock Exchange, but not both. Most of the public firms only issue domestic (A) stock shares, and a small number of the public firms issue both domestic (A) and foreign (B) stock shares. Generally speaking, the domestic share investment is restricted to Chinese citizens, whereas the foreign share investment is restricted to foreigners. Before February 19, 2001, the domestic and foreign markets were completely segmented. After that, the B-share market has opened up for domestic individual investors with foreign currency holdings. This policy removed some barrier between the A- and B-share markets, although the A- and B-share markets are still segmented to a certain degree. Researchers have explored extensively the A- and B-share differences in three areas: pricing, price discovery, and market efficiency. In this project, we would like to investigate the transaction costs of the domestic and foreign shares in the Shanghai and Shenzhen Stock Exchanges after the 2001 reform.