By: The Economist
Published: October 5, 2006

Looking for a good example of market inefficiency?  Look no further than China.  The Economist recently ran a story on the disparities between stock prices of Chinese companies traded both in Hong Kong and on the Mainland.

“Thirty-three companies with a collective market value of $257 billion have shares trading simultaneously on the mainland and in Hong Kong…their shares carry identical legal claims on assets and profits. Theoretically, they should be similarly valued if markets work as they should, allowing buyers and sellers to converge on a price.”

“In China they do not. In every case the value of shares in the mainland and Hong Kong is different. This affects investors, but the biggest cost is to China itself. The jumble of valuations means the capital markets are not providing one of their greatest public benefits, price discovery, which serves as the invisible hand directing capital to where it can be best used.”

“Broadly, bigger and more recognisable companies, such as Bank of China, tend to trade at a premium in Hong Kong. Smaller companies trade at a premium on the mainland. The discount of H-shares to A-shares has narrowed over the past six years from about 90% to below 30%, as prices in the Hong Kong market have risen and prices on the mainland have (until recently) stagnated (see chart).”

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