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Hong Kong Stocks Losing Premium Over Shanghai Market On Protests
Perspective | 02 October 2014

Hong Kong’s biggest political unrest since the 1960s is wiping out the valuation premium of the city’s stocks over their Shanghai counterparts.

The Hang Seng Index’s retreat to a three-month low on 30 September has eliminated the gap between dual-listed shares after it reached 12 percent in July. The Hang Seng has now dropped 1.1 percent in the quarter ended 30 September, versus a 15 percent surge for the Shanghai Composite Index, the biggest performance difference since 2009.

While Hong Kong equities have been held back by clashes between pro-democracy protesters and riot police in the city’s central business district, speculation of Chinese government stimulus has propelled shares in Shanghai. The divergence signals a growing preference for mainland shares before the start of a trading link in October that allows a net Rmb23.5 billion (US$3.8 billion) of daily cross-border purchases.

“With the situation unfolding in Hong Kong, it is conceivable that overseas investors could short Hong Kong as a hedge for their long Shanghai positions after the connect program commences,” Hao Hong, a strategist at Bocom International Holdings Co in Hong Kong, wrote in a report on 29 September.

Tens of thousands of protesters filled streets in Hong Kong through the night to press for open elections and the resignation of Chief Executive Leung Chun-ying, as student leaders set a 1 October deadline for their demands to be met.

ETF Flows

The Hang Seng China AH Premium Index, which measures the weighted average gap between the largest dual-listed shares, rose to 100.1, the highest level since policymakers unveiled the exchange link in April. A level of 100 means H-shares in Hong Kong trade at the same price as A-shares on the mainland.

Investors poured US$3.6 billion into exchange-traded funds (ETF) tracking Chinese equities this year, more than three times more than they added into Hong Kong ETFs, according to data compiled by Bloomberg.

An average of 16 billion shares traded hands on the Shanghai Composite each day since 30 June, almost twice the quarter ended 30 June and the most on record, according to data compiled by Bloomberg. Volume on the Hang Seng slipped less than 1 percent to 1.5 billion shares per day.

Exchange Link

“The Chinese A-share market is showing all the signs of finally moving into a bull market after being a relative underperformer,” said Nader Naeimi, head of dynamic asset allocation at Sydney-based AMP Capital Investors, which manages about US$125 billion. “What we have seen now is just a flick. There’s a lot more potential.”

The Hong Kong-Shanghai link will give foreign investors unprecedented access to mainland shares, allowing Rmb13 billion of net buying per day.

China is counting on a successful bourse link to help liberalise its financial system and increase use of the yuan. Existing rules restrict overseas money managers to foreign currency-denominated B shares, while only those approved under the Qualified Foreign Institutional Investor program can invest in yuan-denominated A-shares.

Chinese institutions and investors with at least Rmb0.5 million in their securities accounts will be able to buy Hong Kong shares using yuan through mainland brokerages. A CLSA survey in September showed 77 percent of mainland investors don’t plan to participate in the bourse link, turned off by rules on the minimum account size and the exclusion of small-cap stocks.

Investment Themes

“The A-share market has lots of small companies engaged in the service industry, creating bunches of thematic investment,” Wei Wei, an analyst at West China Securities Co in Shanghai, said by phone. “Similar targets are hard to find in Hong Kong. That’s why the market here is more active and outperforming Hong Kong.”

Chinese investors opened about 217,000 new equity accounts in the week ended 19 September, the most in two years, according to government data.

The excitement about mainland shares contrasts with a 2007 plan to allow Chinese citizens to buy Hong Kong stocks, later abandoned, which helped drive the Hang Seng to a record.

Market conditions were different then, with a rally in global equities and strong Chinese growth, said Erwin Sanft, the head of China and Hong Kong equity research at Standard Chartered.

About US$1.4 trillion was wiped off the value of global shares from the start of September to 26 September as investors reassessed the likely pace of US Federal Reserve rate increases amid data showing a strengthening US economy. Hong Kong’s dollar is pegged to the greenback, meaning the borrowing costs in the city track those in the US.

In China, the central bank is injecting Rmb500 billion into the nation’s largest banks to address weaker growth.

“The tightening of financial conditions that has brought about strength in the US dollar is having a negative impact on the Hong Kong share market, whereas the same impact is not evident in China,” Naeimi said. “I continue to expect China A-shares to outperform China H-shares over the next year or two.”

How will “Occupy Central” affect the investment landscape? Find out more at the Shares Investment Conference 2014 on 18 October 2014. Visit for more information.

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