21 March 2019
The valuation gap between Hong Kong and mainland traded shares of Chinese firms could narrow this year if the 2014 gains in A-shares hold up. Photo: Bloomberg
The valuation gap between Hong Kong and mainland traded shares of Chinese firms could narrow this year if the 2014 gains in A-shares hold up. Photo: Bloomberg

What next if the A-share rally is not a bubble?

China’s A-shares market has been the top performer in the region in 2014. The Shanghai Composite Index surged 53 percent over the year, with a whopping gain of 37 percent in the last quarter alone.

However, the performance of H-shares in Hong Kong has been fairly disappointing despite the launch of the Shanghai-Hong Kong Stock Connect scheme. The market’s main Hang Seng Index added just 1.3 percent in 2014, after a 3 percent gain in the fourth quarter.

Actually, dual-listed shares, or the so-called A-H shares, saw great divergence in performance. Investors have flooded into mainland and snapped up much more expensive A-shares, while totally ignoring the much cheaper Hong Kong-traded H-shares. That does not make any sense.

On December 31, there were eight A-H shares among the top 10 most actively traded stocks, and all of their A-shares closed higher than the H-shares. For example, the A-shares of Citic Securities (06030.HK) ended 45 percent higher than their H-shares.

Meanwhile, other popular stocks including China Construction Bank (00939.HK), Mingsheng Bank (01988.HK) and China Railway Construction (01186.HK) all have seen their A-shares command premiums of 30 to 60 percent over their H-shares.

Actually, the price gap of A-H shares has been widening since the launch of Stock Connect on November 17. Most north-bound investors are chasing the expensive A-shares. That has come as a surprise for most market participants, who have assumed that mainland investors would flood into cheaper H-shares in Hong Kong. 

The unexpected fund flow explains the widening price gap in A-H shares. The Hang Seng China AH Premium Index rose to 129 points on December 31, which means the A-H premium has widened to 29 percent. By contrast, the price premium has stayed around 2 percent on November 14 prior to the Stock Connect.

North-bound investors are dominated by small and medium-sized global funds, which had no access to A-shares earlier as they don’t have QFII quota, according to fund industry sources. They have been keen to jump on the bandwagon given the bullish market sentiment, and mainly focused on blue-chips as they didn’t have much knowledge about the Chinese market. Price premium didn’t deter the investors.

Also, some foreign funds just bought A-shares for the “year-end window-dressing”. That would allow them to market themselves with the so-called A-share products, knowledge and experience.

If the above two scenarios were behind the massive capital inflow into mainland market, the trend may not last long. The A-H price gap looks set to narrow in the medium term as mainland investors become more familiar with how the Stock Connect works.

H-shares could see dramatic catch-up gains this year if the A-share market rally doesn’t prove to be a bubble. So, buckle up!

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Hong Kong Economic Journal columnist

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