UBS Said to Sell Notes to Benefit From H.K.-Shanghai Link

UBS AG, the world’s largest wealth manager, is marketing structured notes that seek to benefit from price differences between Hong Kong and Shanghai-traded shares of Chinese companies with dual listings when the markets link up later this year, a person familiar with the matter said.

The one-year notes will operate by gaining exposure to A shares -- equities of China-based companies that trade on mainland exchanges -- while shorting equivalent Hong Kong-traded H shares, which currently command a premium. Investors will profit if the difference between the price of the shares narrows, the person said, asking not to be identified because the details are private.

China unveiled a plan in April that will connect the Hong Kong and Shanghai bourses, allowing investors to buy shares listed in Hong Kong via the Shanghai exchange, and vice versa. Equities traded on the mainland are the cheapest versus their counterparts in Hong Kong since 2006. China’s Premier Li Keqiang said the so-called mutual-market access plan will help China to integrate more fully with international markets.

The Hang Seng China AH Premium index, a gauge measuring the price premium of China-listed shares to their Hong Kong counterparts, has fallen since the mutual market access plan was announced, slipping to 88.97 on July 23, the least since May 2006. A reading below 100 indicates A shares are trading at a discount to H shares and the lower the reading, the deeper the discount. Hong Kong’s Hang Seng Index closed at the highest since April 2011 today.

Sectoral Caps

Stocks may include China Life Insurance Co., China Pacific Insurance Group Co., Ping An Insurance Group Co. of China, Agricultural Bank of China Ltd., China Petroleum & Chemical Corp. and Huaneng Power International Inc., which trade at a discount in the A-share market. The final list of shares which may be included hasn’t been set, the person said.

Investments may be limited to companies in the insurance, banking, utility, oil and gas, and coal sectors, the person said, and may be subject to sector caps.

Under the dual access plan, Chinese investors will be able to buy stocks traded on both the Hang Seng Composite Large Cap Index, and the Hang Seng Composite Mid Cap Index, as well as companies traded on the Hong Kong and Shanghai exchanges.

Overseas institutions and investors will be able to trade shares on Shanghai’s SSE 180 and SSE 380 indexes, and dual-listed equities via Hong Kong brokerages.

Existing rules restrict overseas money managers seeking to invest in China to foreign currency-denominated so-called B shares, while only approved institutional investors can invest in yuan-denominated A shares. B shares are domestically-listed shares, trading on either the Shanghai or Shenzhen stock exchanges, in foreign currencies.

UBS plans to market the notes, which will be issued by a special-purpose vehicle, mainly to high-net worth clients, the person said.

Assets under management at the Zurich-based lender rose 15 percent to $1.97 trillion, cementing its No. 1 spot in a global ranking of fund managers by Scorpio Partnership, a London-based consultancy. Bank of America Corp. was second with $1.87 trillion, Scorpio said this month.

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