China, China, burning bright

China, China, burning bright

Stock markets move in mysterious ways, especially when it comes to Chinese equities. All major stock indices with a close association to Chinese equities listed in Shanghai took off from the word go yesterday. The Shanghai A index closed 0.85% higher while the China A50 gained 1.4%. While there should be nothing strange about a rally in Shanghai, considering that a run on shares there has almost been a daily affair these past four weeks, what remains a mystery is the intensity of the move yesterday on these names listed on the Hang Seng, and especially on the HK ‘H’ share index. They gained 3.8% and 5.69% respectively. Their futures contracts have continued to surge overnight further adding another 2%. Not to be misinterpreted, HK ‘H’ shares should trade higher - closer to their Shanghai-listed tranches, which are mostly trading at premiums of 305 or higher. Theoretically, the HK-listed entities represent the same Chinese companies that are dual listed as Shanghai A shares, and should be valued similarly as they share the same financial accounts. The disparity in price is primarily a result of the inefficiencies of the current channel of arbitrage, in this case the barely five-month-old Shanghai-HK connect. Without a free and completely liberated access to both sets of investors, huge imbalances remain between the supply and demand surrounding both categories of investors. With this being the case, a spread in price may offer a fascinating trading concept.

History lesson

For a possible conclusion, can one draw experience from recent history? Few may remember a similar scenario that was played out almost 16 years ago in Singapore, albeit on a smaller scale, with less complexity. Back then, key blue-chips companies in Singapore had separate tranches for both foreign and local shareholders. But then, as could well prove the case now, the A-H shares in China, deregulation of the securities and financial industry in Singapore took hold and both local and foreign shares were consolidated. Traders then enjoyed the ‘closing of the spread’, when both tranches became fungible, eventually merged. The question remains, as always, over timing. Encouragingly, Chinese regulators have moved in ‘light years’ these past months. More importantly, they have also demonstrated this will to further open up the Chinese financial and securities sector, in the many communiques and engagements they have held with stakeholders, both domestic and overseas. Admittedly though, the action in HK yesterday has taken many watchers by surprise. Very often traders have time to neither think nor analyse, not even deliberate: why yesterday? They simply react, not wanting to miss the boat. Nevertheless, despite this compelling story behind the A-H shares, one can only hope that traders have not overreacted in the short term.
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