China Stock Halts Show Two System Limit as Hong Kong Trades Wane

  • Different rules between city and mainland spark trading quirks
  • Vanke's H-share volume has fallen 14% since A-share suspension

China and Hong Kong’s different approaches to stock halts show the limits of the cooperation between the markets. They also offer a peek into how the shares of dual-listed Chinese companies are traded.

Among 13 companies that were halted in China but not in Hong Kong in the past six months, nine saw their volumes in the city fall, according to a Bloomberg News analysis. On average the decliners saw trading drop by close to half their previous levels. Zhejiang Shibao Co., whose shares haven’t traded in Shenzhen since Jan. 20, has seen its Hong Kong volume drop 67 percent. The number of Jiangxi Copper Co.’s shares changing hands in Hong Kong slumped 45 percent over eight days in February when the stock was halted on the mainland.

Fund managers in the region say the decline is due in part to the inherent uncertainty that arises when one market is frozen. Prolonged halts in Chinese equities highlight the differences under the “one country, two systems” approach.

The trend shows that Hong Kong and China’s markets “are really separated, even with the stock connect program,” said Hao Hong, chief China strategist at Bocom International Holdings Co. in Hong Kong. “If a stock that is liquid has an A share that is suspended, theoretically all the trading volume should come to this part of the world to drive H share trading.”

Stocks in Hong Kong, or H shares, are about a third cheaper than their mainland counterparts, known as A shares. Due to capital controls, not everyone who trades in China is able to jump into the H shares when the mainland stock is halted.

China’s long trading halts aren’t just an issue for trading in Hong Kong. MSCI Inc. said in March that prolonged suspensions are a factor as it considers whether to include Chinese stocks in its emerging markets indexes. MSCI said investors don’t want a repeat of July, when half the companies on China’s exchanges suspended trading as shares tumbled. A Bloomberg survey of strategists and fund managers found the majority believe that the overuse of trading halts is the biggest obstacle for China stocks to be added to MSCI indexes.

Manuel Schlabbers, who manages the Accudo Asian Value Arbitrage Fund, says some investors who purchase H shares because of the discount may unwind the position if the mainland listings are halted for an extended period.

Companies can suspend trading on the Shanghai and Shenzhen exchanges for reasons including asset restructuring, delays in financial reports or expectations that material information may be leaked.

The Hong Kong stock exchange says trading halts should last “for the shortest possible period,” according to its listing rules. With many of the A-share suspensions, the Hong Kong shares were briefly halted but resumed trading after the news was released. A spokesman for the bourse declined to comment.

Different Systems

“Except for merger or restructuring, suspension for dual-listed stocks is synchronous in China and Hong Kong,” a Shanghai Stock Exchange spokesman said in an e-mail. “The reason why the halt period for A-shares and H-shares is not entirely the same when it comes to merger or restructuring cases is due to different situations in the two markets.”

The divergent rules are in part a reflection of the different makeup of the investment community in the two markets. Retail investors account for a large percentage of trading in China and the cautious regulations are an effort to ensure no one has an unfair advantage. That’s not as much of a concern for the institutional investors in Hong Kong.

Of the 86 dual-listed stocks, according to the Hong Kong exchange, two were suspended in China and trading in Hong Kong as of the end of last week. The largest of these, China Vanke Co., had lost 14 percent of its average daily volume in Hong Kong since its A shares were frozen on Dec. 18. The company is working out plans to acquire a stake in Shenzhen Metro Group and fend off a hostile takeover attempt from Baoneng Group, its biggest A-share holder.

Average daily volume in Shibao’s Hong Kong-listed stock as of last week had fallen to about 428,000 shares since the mainland stock was suspended, down from 1.28 million in the prior three months. For Jiangxi Copper, daily Hong Kong trading fell to 6.15 million shares when its A shares were halted compared with just over 11 million in the prior three months. After the A shares resumed trading on Feb. 26 average daily volume in the city rose to about 9.87 million through Friday.

“One-sided halts highlight the difference in rules of two markets,” said Eddie Cheng, senior fund manager at Cathay Securities Investment Trust. “We do hope the halting period of A shares can be shortened, and it will be ideal for rules in two markets to be the same.”

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