Beijing’s heavy-handed rescue maneuvers for A-shares have added to the distortions in China’s equity markets.
One example is the rebound of the SSE 50 index – which reflects the performance of large-cap firms, mainly SOE behemoths. The index bounced after Beijing pumped in huge liquidity into the system. However, the market as a whole was still in the doldrums, with over a thousand stocks plunging to the bottom of the daily change range until the Thursday rally.
Looking at the developments in China, we can liken the scenario as akin to deploying the main force to defend the capital city in a key battle while losing most of the other territories.
Another thing that we should note is that while heavyweight blue-chips rallied substantially on Beijing’s backing, the firms’ H-shares in Hong Kong have moved in a diametrically opposite way earlier this week, driving the Hang Seng China AH Premium Index to a record high.
The Hang Seng China AH Premium Index tracks the average price difference of A-shares over H-shares for large dual listed Chinese companies.
Now, here comes the question from numerous individual speculators: Are these H-shares good bargains?
The answer may be just like the outcome of the Greek referendum: 60 percent say Oxi (No) and 40 percent Nai (Yes).
In an “all out” move, Beijing has mobilized the entire nation to stem the security market from sliding further. That said, the money that it can channel – rumored to be 1.7 trillion yuan (US$270 billion) – is still not that adequate as the amount will soon be used up should Beijing choose to “buy up” the entire market, given that average daily turnover now constantly exceeds 1 trillion yuan.
Thus it is justified to inject liquidity into the SSE 50 constituent shares, the mainstay that determines fundraising and futures index, to stabilize and offset the rout. Meanwhile, most small-to-medium sized counters are beset with asset-price bubbles, making it immoral to splurge taxpayers’ money on those value traps.
I am still of the view that the coming week will decide if Beijing can get what it wants from the relentless efforts to prop up the market. If things can stabilize on less frenzied short-selling and smaller turnover, then Beijing can claim initial victory.
What we have seen may just be the first act of what will be a long twisting drama.
When Beijing churns up administrative orders to ban short-selling, investors sell H-shares instead to counterbalance the risk of their A-shares exposure, widening the gap between A- and H-shares.
The Hang Seng China AH Premium Index has shot up as many dual-listed mainland heavyweights have seen their A-shares surge due to Beijing’s emergency support. In some cases, the A-shares are at 50 percent above their H-share counterparts in Hong Kong.
So, is there a golden opportunity to snap up the cheaper H-shares now?
If you ask me, I would advise caution.
We all know that there is no American Depositary Receipt-like channel for trading and converting between mainland and local shares. You cannot buy the cheaper H-shares, convert them into A-shares to fetch the higher prices. There is no means of such arbitrage.
It is true that the price difference will ultimately narrow down to within 10 percent as shown in historical records, but that can be realized through subsequent price declines in the mainland rather than rallies of the H-shares.
The ongoing recovery north of the border is entirely policy-driven, hinging on how long Beijing can continue to prop up the market.
This article appeared in the Hong Kong Economic Journal on July 8.
Translation by Frank Chen
[Chinese version 中文版]
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