Price Disparities between Mainland China’s Onshore and Offshore Financial Markets

Abstract

As the capital account of Mainland China has yet to be fully liberalized, the offshore financial markets in Hong Kong are beneficial to the development of Mainland China’s trade and financial integration with the rest of the world. However, the institutional separation¹ between the onshore and offshore financial markets has created price disparities for the same underlying assets, with prominent examples including the A- and H-shares in the equity markets, the onshore deliverable and offshore nondeliverable renminbi forward exchange-rate markets, and the onshore and offshore renminbi spot exchange-rate markets. Despite increasing integration of the onshore and offshore markets in recent years, significant price disparities continue to exist, and at times, particularly during periods of financial turbulence, they could be fairly large. To gain a better understanding about the causes and implications of such disparities, this chapter aims to shed light on the following issues: (1) why onshore and offshore investors would pay different prices for the same underlying assets; (2) whether the price disparities would converge over time when there are shocks to the markets; and (3) if there exists causation linkages between the two markets.