CROSS-MARKET TRADING IN CHINA'S LARGE STATE-OWNED COMMERCIAL BANKS, 2006-2011.

This paper examines the differential between the share prices of China's large state-owned commercial banks traded in Shanghai versus prices observed in Hong Kong. We find a significant role for investor sentiment, as reflected in relative price-earnings ratios, in explaining these price differentials for all four banks. The share price in Shanghai tends to move ahead of the share price in Hong Kong when more positive sentiment in Shanghai makes local investors willing to pay more for the same predicted earnings. We also identify common trends in relative bank price-earnings ratios and price differentials across the two markets. ( JEL G14, G15) [ABSTRACT FROM AUTHOR]