Sunday, March 22, 2015

Regulations: how China stock market works

   The Shanghai Stock Exchange – the first stock market of the People’s Republic of China – opened on November 26, 1990. On April 11, 1991 the Shenzhen Stock Exchange was established. Concern about the potential negative influence of the securities markets on social stability led the Chinese government to impose price limits at the beginning: upper and lower price limits were imposed on both A and B shares on July 27, 1990. However, in the first few years, the stock markets were very quiet and trading was very thin. To stimulate their development, the government withdrew its price limits on May 12, 1992 and adopted a free trading policy until December 16, 1996. From 1992 to 1995, the securities markets were overheated and there were many speculative activities. Due to the same concern about social stability and the healthy development of the market, the Chinese government restored the price limit policy on December 16, 1996, and price limits remain effective.
    Both the SHSE and the SZSE are order-driven, with no market makers or specialists. The price limits are set at +/-10% of the preceding day’s closing price. There can be no special announcement from the company when its price hits a limit. However, the trading screens of the stock exchanges do indicate when a price limit has been hit. During the trading day, if a stock hits its price limit, then it is allowed to trade as long as the next order is within the prescribed range. It is worth noting that the SHSE and SZSE price limits are mainly boundaries, but they can become trading-halt triggers. If a stock hits its price limits for three consecutive days, then it is suspended. Once the stock is temporarily suspended, the board of directors must provide the reason for the abnormal fluctuation in stock price to the stock exchange. The stock can resume trading until the afternoon trading session on the day when the company makes its announcement. The tick size of stocks that are listed on the SHSE and the SZSE is fixed at RMB 1 cent regardless of the current stock price, e.g., the next bidding price of a RMB ¥1 stock could be RMB ¥1.01, while that of a RMB ¥100 stock could be RMB ¥100.01.
  The SHSE and the SZHE open from Monday to Friday. Each exchange has two trading sessions: the morning session opens at 9:30 and closes at 11:30, and the afternoon session begins at 13:00 and ends at 15:00. Two different shares are traded on both exchanges: A shares and B shares. A shares are available to Chinese citizens only, and B shares are available to foreign investors. 
  The SHSE and the SZSE operate under similar legal and regulatory environments; however, some previous studies on the Chinese markets suggest that investors appear to be biased against firms listed on the SHSE; see, for example, Chakravarty et al. (1998). For the price limits issue studied in this paper, we also conduct all the tests for the SHSE and the SZSE separately and find no significant difference between the results for the two stock exchanges. Therefore, we only report the results for the combined stock exchanges. The Chinese stock markets have grown rapidly over the sample period. The number of listed stocks increased from 530 in 1996 to 1287 in 2003, while the total market capitalization rose from 104.8 billion RMB 1992 to 4245.8 billion RMB in 2003. Table 1 reports some basic statistics for the Chinese A share markets.