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New index to track AH share price gaps

(chinadaily.com.cn)
Updated: 2007-07-03 10:33

A new index will enable investors to track the price gap between shares of companies traded on both the Hong Kong and Shanghai bourses, with the launch of Hang Seng China AH Premium Index, although opportunities for arbitrage between the two markets will remain limited, said HSI Services.

While 45 Chinese companies are listed on both stock exchanges, Hong Kong and Shanghai investors have reached different conclusions about their valuations. Shanghai's renminbi-denominated A shares, which can only be bought and sold by domestic investors, trade at an average 40 per cent premium to their Hong Kong counterparts.

Yet there has been no real-time measure of this differential. HSI Services, which compiles Hong Kong's blue chip Hang Seng index, plans to change that with the Hang Seng China AH Premium Index.

The index, consisting of large companies traded on both stock markets, will be launched this month and indicate the premium or discount at which Shanghai shares are trading compared with Hong Kong shares, with a measurement of 100， indicating there is no price difference.

According to the AH Premium index, the price gap reached a peak on June 13, when A shares were 58 per cent more expensive than their H share counterparts.

The price difference can be partly explained by China's capital controls and the differing perspectives of domestic and international investors. The increasing scale of the difference, however, is fuelling calls for arbitrage mechanisms to be developed.

Last month, Hong Kong top financial officials pledged in separate interviews with the China Securities News that the difference between H- and A-share prices will diminish eventually.

Eddy C. Fong, chairman of the Securities and Futures Commission, said it is normal that there is price difference between the A- and H-shares of a same company, as there are still hurdles between the two markets, including systematic and exchange rate problems. But with closer ties between the two sides and the improvement of capital flow channels, the gaps will get smaller in the long run, he said.

Hong Kong had suggested to set up a cross-trading platform for the stocks listed on both of the markets, said Ronald Joseph Arculli, independent non-executive chairman of Hong Kong Exchange and Clearing Ltd. Such a platform, said Arculli, may help reduce the price discrepancies, but needs more commercial and political supports for its initiation. With better conditions in liquidity and price-recognition mechanisms in further cooperation between the two sides, the gap in share prices of the A+H companies will diminish, he said.

Mainland companies accounted for 73 percent of equity raised last year in Hong Kong and contributed to nearly half of the city bourse's market capitalization, according to regulatory data. Hong Kong last year hosted nearly 50 percent of the fund-raising activities by mainland enterprises, including giant banks and energy firms, which raised more than US$45 billion through stock sales there .