Shuli Ren is a Bloomberg Gadfly columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.

Chinese investors are piling into Hong Kong stocks again, but they're being choosy, treating two peas from the same pod in different ways.

Mainland investors have snapped up some $2.5 billion of shares in Industrial & Commercial Bank of China Ltd. over the past two weeks, Shanghai-Hong Kong connect data show, helping to push the lender's stock in the city up 35 percent since January. China Construction Bank Corp. doesn't even make the top 10 most-popular shares. It's gained 15 percent this year and trades at a 10 percent discount to ICBC on a forward-earnings basis.

Shares of China Construction Bank are underperforming ICBC due to the risk a large amount of stock could hit the market at any time
Source: Bloomberg

What's going on?

It boils down to the companies' class of shares.

State-owned firms listed in Hong Kong typically have two types of stock: Domestic shares, which can only be held by legal persons or entities in China, and foreign shares, which can be freely traded in Hong Kong. To sell domestic shares, regulatory approval must be sought from Beijing.

CCB is an interesting case. When it went public in Hong Kong in 2005, China allowed all its shares to be fully convertible and able to be traded without restriction in the city. As such, any of its shareholders, which range from state-owned Central Huijin Asset Management Co. to China Baowu Steel Group Corp., can cash out when they wish.

Rare Bird
Pretty much all of China Construction Bank's stock can be freely traded in Hong Kong
Source: CCB filings

ICBC, by comparison, made less than 25 percent of its stock freely tradable in Hong Kong. Its two biggest shareholders, Huijin and China's Ministry of Finance, can only offload their stakes in Shanghai.

Locked Up
Only 24 percent of ICBC's shares can be traded in Hong Kong
Source: ICBC filings

This subtle distinction is making a world of difference for momentum-hungry mainland investors, who tend to favor stocks that can be pushed higher. When shares in the two lenders were range-bound, they were essentially interchangeable. Now that prices are starting to edge toward book value -- above which Huijin, in CCB's case for example, would be permitted to sell -- you're seeing a divergence. CCB's stock is viewed as being under pressure, whereas ICBC is immune.

Other Hong Kong-traded Chinese companies could be affected too. Caixin reported last week that Beijing plans to start a trial program allowing some firms to convert any non-tradeable domestic stock into free-floating H shares. ZhongAn Online P&C Insurance Co. has already applied, according to the financial magazine. More than 80 percent of its total share capital is locked up in the form of domestic shares, held by major backers such as Ant Financial, the payments affiliate of Alibaba Group Holding Ltd., Tencent Holdings Ltd. and Ping An Insurance Group Co.

To the Chinese government, having fully convertible shares better aligns the interests of management and investors. Why run a company with accountability in mind when your top shareholders can't sell anyhow?

Stock markets, on the other hand, see full convertibility in a different light, as demonstrated by the underperformance of CCB. Another case in point is ZhongAn: Its shares have soared 31 percent since its September debut largely on scarcity value.

Hong Kong is in bull mode, with the benchmark Hang Seng Index up 33 percent so far in 2017. Opening the full convertibility flood gates however would have the potential to unleash a torrent of fresh supply. There are about 206 mixed-share companies traded in Hong Kong with a total market capitalization of $1.9 trillion. If you assume 75 percent of those shares are domestic and all become tradeable, new supply north of $1.4 trillion would hit the exchange.

China is cognizant of this and isn't going to let that happen. Likely its trial will extend to just a handful of firms. That's a relief for investors: There would hardly be another way to kill the bulls quicker.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Shuli Ren in Hong Kong at

To contact the editor responsible for this story:
Katrina Nicholas at