After a 39% Rout, China Stocks Are Still Double Hong Kong Prices

Updated on
Is This the China Hard Landing Investors Fear?
  • Dual-listed stocks trade at 115% average premium in mainland
  • Selloff has erased almost $5 trillion of China market value

For all the losses in Chinese stocks since the nation’s record bull market ended in June, shares on mainland exchanges are still more than twice as expensive as their identical counterparts in Hong Kong.

Dual-listed companies traded at an average 115 percent premium in China at the end of last month, within three percentage points of a four-year high in July, according to monthly data compiled by Bloomberg. The price differences have persisted even as a $4.9 trillion selloff dragged the Shanghai Composite down 39 percent from this year’s high.

Viewed for months as a sign of over-valuation in mainland shares before they peaked in June, the gaps have failed to shrink as government-backed funds intervened to prop up the local market. CMB International Securities, KGI Securities Co. and Fortune SG Fund Management Co. say it’s only a matter of time before valuations on yuan-denominated A shares come back down to Earth.

“A shares are still overvalued,” said Daniel So, a strategist at CMB International Securities in Hong Kong. “Downside risks are larger than upside potential.”

The divergence widened again on Tuesday, according to the Hang Seng China AH Premium Index. That gauge, which gives a bigger weight to larger companies, shows the mainland market valued at a 41 percent premium. The Shanghai Composite dropped as much as 4.7 percent on Wednesday before paring losses to 0.2 percent at the close.

Authorities renewed their intervention in equities last week to halt the biggest selloff since 1996, according to people familiar with the matter. The securities regulator also asked brokerages on Saturday to step up their support for share prices by contributing 100 billion yuan ($15.7 billion) to the nation’s market rescue fund.

Short Curbs

The effort to support markets is part of a broader push to ensure nothing detracts from tomorrow’s World War II victory parade, which the government will use to demonstrate its rising military and political might.

“Most dual-listed shares are highly overvalued in Shanghai due to government intervention,” said Ken Chen, Shanghai-based analyst at KGI Securities.

Price gaps are unlikely to narrow any time soon because the government is still intent on supporting the mainland market, said William Wong, the head of institutional sales trading at Shenwan Hongyuan Securities in Hong Kong. Restrictions on short sales in the mainland may be driving investors to bet against Hong Kong equities instead, putting additional pressure on so-called H shares in the former British colony, he said.

The intervention has been driving away foreign investors. They cut holdings of mainland shares through the Shanghai-Hong Kong exchange link over the past two months, pulling out about $4.8 billion since the end of June.

“I expect the A/H premiums to narrow in the long term” as mainland valuations drop, said Alexandre Werno, a Shanghai-based executive vice general manager at Fortune SG Fund Management, which oversees about $11 billion.

— With assistance by Shidong Zhang, and Cindy Wang

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