We all knew this was coming. It was just a matter of time before the Hang Seng Index (HSI) hits 30,000. Obviously I'm saying this as a person who's looking back at the 47% rally in HSI year to date, yet even without this data, we knew HSI was going to rise. Why? Simply because of something known as the H Share/A Share price disparity.
Since Shanghai began trading, mainland Chinese stocks listed on the Hong Kong Stock Exchange, known as H Shares, haven't performed as well as (or rather has been traded as high as) A Shares, mainland Chinese stocks listed on mainland exchanges. Almost half of all dual-listed companies have twice as expensive A Shares than H Shares. Mainland Chinese stocks on average trade at 56 times earnings, making them some of the most expensive stocks in the world.
Why is that occurring and what is going to happen next?
Why there remains a price disparity is due to the fact that H Shares are traded in the open Hong Kong market, whereas A Shares are traded domestically within China, were inbound and outbound investment is tightly regulated. As a result, all the liquidity in China thriving market is bubbling up in Shanghai instead of overseas or Greater China equity markets. China's Securities Regulatory Commission, in its infinite wisdom, has now decided to put an end to this price difference by an arbitrage scheme.
Bloomberg cleverly said that, "investors can't profit from the price gap because of restrictions on currency conversion and stock ownership. Yuan-denominated A shares are available only to Chinese individual and institutional investors, as well as selected foreign investors." But wait a minute. Who said anything about buying A Shares? Obviously, if H Shares are A Shares' cheaper twin, we're going to buy H Shares. Plus, H Shares are traded openly, so everyone can chip in.
By buying H Shares in light of this scheme, we'll probably profit from the arbitrage when it comes around. It'll work like this: China will open a larger quota on its QDII (see previous post) and greater cash flows will enter Hong Kong, whereby HSI will go up. Definitely a bullish trend there. As an analyst from JP Morgan says, "China's QDII and through-train programs will be the key arbitrage vehicles in the near future." So look out, but hurry up. Even the mention of "arbitrage" will re-adjust the market rate of H Shares, most of which are already at astronomical prices already.
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