Wednesday, January 7, 2009

A and H shares near parity

--Tight capital regulation prohibit arbitrage between A and H shares
--The shot up of H shares is attributed by its relative low evaluation and shorting
By Andrew Wood in Hong Kong
Published: January 6 2009 17:48 Last updated: January 6 2009 17:48
The difference in the share prices of Chinese companies listed in both Shanghai and Hong Kong has narrowed dramatically in recent weeks and may disappear if the Chinese economy proves resilient in the slowdown.
The A shares of companies traded in Shanghai or Shenzhen were on average 16.1 per cent higher than the H shares of the same 56 companies listed in Hong Kong, compared with 44 per cent in early December and a peak of 108.1 per cent on 16 January 2008, according to the Hang Seng China AH Premium Index.
Shanghai was the world’s best-performing market in 2007 thanks to huge demand by domestic investors who could not buy shares overseas.
But mainland retail investors have turned cautious after the Chinese market halved in 2008. The internationally oriented Hong Kong market has recovered from 2008’s lows more quickly, narrowing the price gap.
The premium could even turn into a discount if foreign investors become “massively bullish” on Chinese companies and so bid up H shares in Hong Kong, said Khiem Do, head of Asian multi-asset at Baring Asset Management.
“If A shares trade at a discount, that means overseas investors are going crazy about China again and they can’t access the A share market, therefore they have to buy H shares.”
That could happen if China grows more than expected or if the US and other developed economies shrink further than feared in 2009, he said. “But there are some very big ‘ifs’ there.”
Hong Kong shares have risen faster than their mainland counterparts, Mr Do said, partly because some investors shorted the Hang Seng and the Hang Seng Chinese Enterprises Index of H shares as proxies to hedge against other emerging markets. As markets recovered, they had to buy back the shares. “That’s why the bounce has been so big.”
Even now, the shares of some small companies such as Nanjing Panda Electronics and Sinopec Yizheng Chemical trade on mainland markets at about 4½ times their Hong Kong price.
In theory there should be negligible differences be­tween shares listed on two or more stock exchanges.
But China has strict capital controls. They prevent arbitrageurs from buying shares of a dual-listed company cheaply in Hong Kong and selling them at a higher price on the mainland – a process that would eventually equalise prices.
“In Hong Kong and in Shanghai and everywhere else the methodology [of valuation] is the same, but prices do vary from the intrinsic value,” said Steven Sun, senior China equity strategist for HSBC. “In the long run the difference should narrow.”