The impacts of stamp duty on cross-listed Chinese stocks

Abstract

This thesis examines the market quality of the Mainland China stock markets during three major stamp duty adjustments in terms of market efficiency and market integrity. It also examines the cross-market impacts on the related Hong Kong stock market, (HKEx), using a sample of A-shares and the cross-listed H-shares trading simultaneously on the two markets. This thesis investigates the change in the turnover rate, price volatility, effective spreads, realized spreads and price impacts for a sample A-shares on the Mainland China stock markets and the cross-listed H-shares on the HKEx before and after the stamp duty adjustments. I find that these stamp duty adjustment did not fully fulfil the Chinese policymakers’ goal of reducing short-term volatility in the Mainland China stock markets when it was an overheated “bull” market, or boosting trading volume during a depressed “bear” market. Secondly, this thesis finds some empirical support for an extended theory proposed by Levy and Swan (2012). I examine how the prices of two identical stocks in separate markets with different market liquidities and transaction costs behave in the two-market scenario described above. The liquidity levels have evolved in the Mainland China stock markets and the HKEx during the sample period. When the Mainland China stock markets are the more liquid market, a stamp duty rise in Mainland China reduces the price premium of the sample of A-shares in the Mainland China stock markets relative to cross-listed H-shares in Hong Kong market. As transaction costs increased dramatically in Mainland China due to stamp duty increases, investors migrated to the HKEx, although, technically, Mainland China was still under strict capital control. Thirdly, this thesis investigates if information leakage occurred across markets in both the Mainland China stock markets and the HKEx before the announcements of stamp duty adjustments. The results show that information leakage before the announcements of the stamp duty adjustments first occurred in the Mainland China stock markets, but later shifted to the HKEx, consistent with the finding that interaction between Mainland China and Hong Kong has increased significantly in the past decade.