Risk-Return Dynamics of the Chinese Stock Market: A Comparison between A, B and H Shares

Abstract

This study compares the risk-return characteristics of the Chinese A shares with that of B and H shares over the period from January 1995 to June 2012. On average, B and H shares offer a better risk-adjusted return irrespective of whether the returns are measured in the Chinese Yuan (domestic perspective) or in the US dollar (foreign perspective) terms. However, a "timeline" analysis indicates that the relative advantage arising from investment in B or H shares may be nearing the end. This finding appears to be a consequence of investment schemes which allow domestic and foreign investors to cross each other"s territories after opening up of the Chinese market to foreign investors. Second, there is some evidence of exchange rate advantage for foreign investors, even though it is negligible. The results of our study suggest that any additional benefit generated by slight (average annual) appreciation of Yuan against the dollar is offset by an increase in volatility of returns measured in the US dollar.