This implies that the H-share discount rises when Shanghai investors bid SOCB share prices up in excess of what most other companies in that market are accorded relative to earnings.
The relationship between individual bank P/Es and market average P/Es also appears to be an important determinant of SOCB H-share discounts.
The differences in the behavior of the SOCB discounts caused pooling to be rejected by the data and therefore precluded panel analysis in the present case.
A particularly striking aspect of the early trading history of the SOCBs is that investors in Hong Kong seemingly remained unwilling to pay as much as investors in Shanghai.
The importance of these SOCBs is reflected in the fact that ICBC alone accounts for near 10% of the entire Shanghai A-share market.
Despite substantial improvements in recent years, most analysis of China's banking system continues to point to the SOCBs lagging behind other types of banks, namely joint equity banks and city commercial banks, in terms of their operating performance and efficiency levels.
Having embarked on market reforms a decade before Viet Nam, it is hardly surprising that China is somewhat more advanced with financial sector reform: the heavier burden of state-enterprise debt on the balance sheets of its SOCBs has made reform both more difficult and more urgent in China.
Since two-thirds of the FDI from 1991-98 was directed into joint ventures with SOEs (IMF, 1999a), its steep decline has worsened the financial situation of the latter, which has in turn affected their capacity to repay their debts to the SOCBs.
In both countries, a key element of banking reform (discussed in the next section) has been to spin off such policy lending from the SOCBs to specialized policy banks, but progress thus far has been slow.
Lardy (1999) notes that, while some of the major SOCBs in China are most probably insolvent, they are still liquid since continued public confidence in the banks (and the paucity of alternative savings vehicles) ensures that, with rising incomes, households continue to add to their bank deposits.
The Gordian knot binding together the SOEs and SOCBs has meant that the mounting financial losses of the former have inevitably translated into worsening financial difficulties for the latter.
In China, the situation is exacerbated, as Lardy (1999) notes, by the fact that the SOEs have come to depend ever more heavily on credit from the SOCBs to finance their activities, including payment of workers' wages and retirees' pensions(7) in addition to capital investment.