The days of paying different prices for the same stock in Hong Kong and Shanghai are numbered, according to Morgan Stanley.
Valuation gaps between dual-listed shares will disappear as an exchange link between the two cities leads to the creation of a “one-China” market, Jonathan Garner, the head of Asia and emerging-market strategy at Morgan Stanley, said in a Bloomberg Television interview in Hong Kong today. Yuan-denominated A shares on the mainland are valued at a discount of about 7 percent versus Hong Kong counterparts, known as H shares, according to the Hang Seng China AH Premium Index.
“We’re looking for A-H stock price convergence,” Garner said. Over time, the gaps “will effectively come down to zero,” he said.
While the Shanghai Composite Index (SHCOMP) has rebounded 11 percent since mid-March on speculation government stimulus will revive growth in the world’s second-largest economy, the gauge has lagged behind a 20 percent surge in the Hang Seng China Enterprises Index (HSCEI) of H shares. The planned tie-up, scheduled to start around October, will give foreign investors unprecedented access to the mainland market while opening a route for wealthy Chinese investors to buy Hong Kong stocks.
Trading rules for A shares through the exchange link needs to be more similar to Hong Kong for investors to be interested, the city’s brokers told Shanghai bourse executives at a meeting today, said Martin Sin, an assistant to lawmaker Christopher Cheung, who represents securities firms. Hong Kong brokers want day trading of A shares when the link starts, he said.
The Shanghai Composite dropped 0.1 percent to close at 2,221.60 today, while the Hang Seng China index added 0.2 percent. The Hang Seng China AH Premium Index slid 1 percent to 92.32, signaling a widening gap between dual-listed stocks.
The $5.5 billion iShares China Large-Cap ETF, which tracks Hong Kong-listed securities, slipped 0.4 percent to $40.86 at 9:51 a.m. in New York.
The Shanghai measure jumped to an eight-month high yesterday as a report showed inflation was subdued last month, giving policy makers more scope to ease policy. Data tomorrow will probably show industrial output growth in July kept pace with June’s 9.2 percent gain, which was the biggest for a single month since December, while growth in fixed-asset investment excluding rural households picked up to 17.4 percent in the first seven months, according to Bloomberg News surveys.
Valuation gaps between the two exchanges reached the widest since 2006 on July 23 as mainland investors exited the stock market and international money managers awaited details of the exchange tie-up.
A survey conducted by CLSA Asia-Pacific Markets of 401 mainland investors showed 77 percent of them aren’t interested in investing in Hong Kong stocks through the link. The biggest obstacle is the minimum account requirement of 500,000 yuan ($81,222), CLSA analysts David Murphy and Lei Chen wrote in a report dated yesterday.
“Nearly half of them say the threshold is too high,” the analysts wrote. “If there were no funding threshold, the share of potential investors could expand to over 90 percent.”
While the system won’t be “perfect,” the exchanges are pushing forward because the tie-up will help open up China’s markets and boost Hong Kong’s role as a global financial hub, Charles Li, the chief executive officer of Hong Kong Exchanges & Clearing Ltd., wrote in a blog posting this week.
HSBC Holdings Plc (HSBA) and billionaire Li Ka-Shing’s Cheung Kong Holdings Ltd. (1) are two Hong Kong-traded companies attractive to mainland investors, CLSA and Morgan Stanley (MS) said. Cheung Kong and HSBC, Europe’s biggest bank by market value, along with AIA Group Ltd. (1299), the second-largest Asia-based insurer, offer “very interesting geographic exposure that you can’t get onshore,” Garner said.