Hang Seng Index

What we learned from the through-train cancellation

PUBLISHED : Wednesday, 20 August, 2008, 12:00am
UPDATED : Wednesday, 20 August, 2008, 12:00am


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One year after the initial announcement of the 'through-train' scheme to allow mainland investors to buy Hong Kong-listed stocks, we have long ago given up waiting for its arrival and are left standing on the platform wondering what we should learn from the service's cancellation.

Back in August last year, the whole idea seemed to offer the Hong Kong market a desperately needed lifeline. While mainland stocks continued to soar to new heights, Hong Kong-listed H shares had tumbled 18 per cent in a matter of weeks as the city's markets began to feel the grip of the credit crunch. As a result, the premium at which mainland-listed A shares trade to H shares widened to a record 80 per cent (see the chart below).

In principal, the through-train idea appeared to kill two birds with one stone. Allowing mainland investors limited freedom to buy Hong Kong-listed stocks would both divert fund flows away from bubbly mainland markets and shore up sagging prices here.

Hong Kong stocks promptly rebounded, with H shares rising 85 per cent over the next three months as investors attempted to front-run the anticipated influx of mainland funds.

Unfortunately, the State Administration of Foreign Exchange, which proposed the idea, was premature in its announcement, having failed to enlist the support of other state agencies. A bitter bureaucratic turf war ensued until Premier Wen Jiabao finally halted the programme in November.

The Hong Kong market has since slumped back to roughly where it was a year ago. The lesson is clear: Hong Kong investors should not rely on deus ex machina favours from the mainland authorities to support the Hong Kong market. They would be far better off sticking to traditional investment techniques, like looking for good companies at attractive prices.

Yesterday provided a welcome fillip for the stocks of mainland electricity generators listed in Hong Kong. Datang International Power Generation was typical, with its shares rising 3 per cent in response to investors' expectations that the mainland authorities were about to raise wholesale electricity prices.

Those expectations were not disappointed. After the market's close, the National Development and Reform Commission announced it is to increase the tariff power producers can charge for each megawatt hour of electricity they sell to the distribution grid by 20 yuan (HK$22.75).

The latest increase follows an earlier price rise of 25 yuan per megawatt hour, which came into effect at the beginning of July.

Any increases in tariffs are good news for the generating industry. Before last month's price rise, the previous nationwide increase in power tariffs was back in July 2006. Since then the price of the coal the mainland burns to generate around 80 per cent of its electricity has more than doubled, while electricity tariffs remained static.

As a result, producers' share prices have suffered heavily in recent months (see the chart above) with a number of companies warning that they made losses in the first half of the year.

Coming on top of July's tariff increase, yesterday's price rise will go some way to making up the shortfall - but not very far.

According to specialist research company Urandaline Investments, in June the average Chinese power producer earned 350 yuan for every megawatt hour of electricity it sold to the grid. Following the recent tariff increases, the average generator will now be making around 395 yuan.

Yet with the high price of coal and the heavy cost of capital needed to fund investment in new generating capacity, Urandaline estimates the cost of generating electricity in a typical coal-fired power station in Shanxi comes to 450 yuan per megawatt hour.

In other words, even after the latest round of tariff increases, a typical Chinese power producer will still be taking a loss of more than 50 yuan, or around 12 per cent, on each megawatt it generates. So although yesterday's price rise may not have disappointed investors' expectations, neither did it fulfil their fondest dreams.