The behaviour of retail investors and price discovery in China

Abstract

China has, in the last decades, seen tremendous economic growth. Retail investors characterize the equity market, and these retail investors, who have a substantial impact on the price discovery in the mainland stock markets of China, are not entirely rational in their financial behaviours. Dual-listed A+H share companies have been the object of study in quantitative research, using classic theories and theorem in the process of trying to explain the fundamental grounds of price discovery. Among these studies, scholars name behaviour as a void, thus this paper investigates the behavioural aspect and its effects on price discovery in mainland China. A realistic review with market-opening policies as interventions is conducted in order to find evidence regarding the problem at hand. The literature study is reinforced with own observations which lay the ground for a possible theory behind the price disparity of dual-listed A+H listed companies. Furthermore, an interview made by Huang, X. (2015) give a hands-on, personal, perspective of retail investor behaviour among the Chinese. The study concludes that the price discovery of the A+H share is affected by the dynamics of the Chinese mainland market. The sheer size of the ever-growing group of retail investors, their increased amount of capital allocated to the stock market and the limited amount of available equity (Free-Float) make for skewness in the supply and demand of shares, also, the young market environment and Chinese culture seem to limit the new investor’s rationality. Moreover, the observations in this study expose a cycle behind the price disparity, which has its roots in the theoretical framework of financial behaviour applicable to the Chinese retail investors.