Appetite for mainland stocks drove the price gap for shares listed in both Hong Kong and Shanghai to the narrowest since a plan to link the cities’ exchanges was announced five months ago.
The Hang Seng China AH Premium Index climbed to 98.09 as of 11:10 a.m. in Hong Kong, heading for its highest closing level since March 21, according to data compiled by Bloomberg. The gauge tracks the difference in prices between Chinese companies listed in Hong Kong, known as H-shares, and A-shares traded on the mainland. Readings below 100 indicate A-shares are priced at a discount to their Hong Kong counterparts.
The Shanghai Composite Index closed today at an 18-month high as mainland investors open share accounts at the fastest pace in two years before cross-border trading starts in October. The net 23.5 billion yuan ($3.8 billion) of daily cross-border purchases will give foreign investors unprecedented access to Chinese securities, and U.S. exchange-traded funds that track the shares have seen record inflows over the past two months.
“Investors are probably pulling funds out of Hong Kong and switching to Shanghai, which is still trading at a discount,” Desmond Chua, a strategist for CMC Markets in Singapore, said by phone. “We could see more of this arbitrage happening once the trading link starts next month.”
Chinese investors opened about 217,000 new equity accounts in the week ended Sept. 19, according to official securities data. A-share accounts containing assets climbed by 158,000 to 52.5 million in the period.
The Shanghai Composite is valued at 9.3 times estimated earnings, some 22 percent below its five-year average, compared with 10.9 for the Hang Seng Index, according to data compiled by Bloomberg. Anhui Conch Cement Co. is trading at a premium of about 17 percent in Hong Kong compared with its Shanghai listing.
“For the Shanghai-Hong Kong connect, the appeal is in the A shares,” said Wei Wei, an analyst at West China Securities Co. in Shanghai yesterday. “I don’t think mainland investors will be keen to buy H-shares, which are mostly more expensive. Also, the quota isn’t too big, so the impact on H-shares won’t be too big.”
Hong Kong Exchanges & Clearing Ltd. hasn’t decided the start date of the trading link, it said in an e-mail today. The link will start Oct. 27, Reuters reported earlier, citing unidentified people with knowledge of the matter.
By ADAM HAIGH, JONATHAN BURGOS, & WEILI LIM September 26, 2014 in Bloomberg