Date
24 November 2017
Shanghai-Hong Kong Stock Connect continues to draw lackluster response from foreign investors, prompting Chinese regulators to relax investment rules. Photo: Bloomberg
Shanghai-Hong Kong Stock Connect continues to draw lackluster response from foreign investors, prompting Chinese regulators to relax investment rules. Photo: Bloomberg

A-H share gap offers arbitrage opportunity

Chinese mutual funds can access the Hong Kong stock market via a cross-border trading link without a qualified domestic institutional investor quota.

The China Securities Regulatory Commission made the announcement last week.

The move came as Shanghai-Hong Kong Stock Connect continues to draw lackluster response from foreign investors.

Mainland China’s A-share market has been dominated by domestic investors. As a result, dual-listed stocks have seen their H shares trade at an increasingly big discount to their A shares.

The price discount has widened this year which may have tempted some mainland funds to buy H shares for arbitrage opportunities.

If so, those funds that have been actively shorting China Enterprise stocks might need to replenish their holding.

Meanwhile, the “One Belt, One Road” strategy, a master plan for connecting China with the rest of Asia, Europe and the Middle East, could stimulate market sentiment and narrow the price gap.

The narrowing of the A-H price difference largely depends on foreign investors who will buy into the A-share market boom and therefore make the mainland stock market more international.

However, foreign investors have been staying away from expensive A shares, expecting most state-owned enterprises to post slow earnings growth amid an economic slowdown.

At the same time, interesting opportunities in global markets such as Europe, the United State and Japan are cropping up.

Global investors are more actively shorting shares in China and Hong Kong.

Also, most foreign funds are against the proposed inclusion of A shares in MSCI, suggesting they have not been betting on A shares.

Moreover, Beijing has been continuously stepping up economic stimulus, a sign domestic economic growth is running out of steam.

In this case, the move to attract mainland funds to Hong Kong may have a one-off effect. Investors should carefully pick individual stocks.

For short-term investors, the move may act as a catalyst for a rebound.

The Hang Seng China Enterprise Index has outperformed the Hang Seng Index and the Shanghai Composite Index recently.

Investors should place some bet on Stock Connect plays such as Hong Kong Exchanges and Clearing Ltd (00388.HK) and a number of blue chips such as China Mobile (00941.HK) and Tencent Holdings (00700.HK).

CKH Holdings (00001.HK), AIA Group (01299.HK) and BYD Co. (01211.HK) are also very attractive.

The A-H price gap is now big enough to prompt mainland institutional investors to buy Hong Kong shares. Investors should pay attention to some relevant plays.

With the government pushing “One Belt, One Road”, related counters in infrastructure, ports, construction materials and railways should benefit.

Many of state-owned enterprises are trading at a 40-80 percent discount in Hong Kong in relation with their A shares.

The price divergence has been largely due to different investor profiles in the two markets, particularly the percentage of institutional and retail investors.

Investors should look into some interesting plays such as China Railway Group (00390.HK), China Railway Construction Co. (01800.HK), Anhui Conch Cement (00914.HK) and Jiangxi Copper (00358.HK) which will be sought after before the end of the first quarter.

This article appeared in the Hong Kong Economic Journal on March 31.

Translation by Julie Zhu

[Chinese version 中文版]

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JZ/JP/RA

columnist at the Hong Kong Economic Journal

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