For mainland equity investors, ‘buy low, sell high’ has never been the name of the game
Mainland retail investors are lukewarm towards Hong Kong-listed stocks despite the fact that H shares are trading at a huge discount to A shares.
The psyche of mainland Chinese investors could be affected by fundamentals, economic policies, company performance and the introduction of new trading rules – but they are particularly alert to one thing: liquidity.
This mentality, typical of mainland retail investors, sheds light on their lukewarm interest in Hong Kong-listed stocks despite the fact that H shares are trading at a huge discount to A shares.
“Mainland investors want to play at home since they anticipate an influx of speculative capital following a sharp fall in January,” said Ivan Li, a trade dealer at Everbright Securities. “They have yet to realise the attractiveness of the H shares.”
The price gap between the A and H shares of companies dual-listed in Hong Kong and the mainland remains huge, giving mainland investors tremendous opportunities to build up their positions through existing facilities such as the Shanghai-Hong Kong stock connect scheme and the qualified domestic institutional investor scheme.
But they have consistently snubbed calls from fund managers to buy Hong Kong shares, having used only half of the 250 billion yuan (HK$298 billion) quota slated for southbound trading under stock connect.
When the scheme linking the Shanghai and Hong Kong equity bourses was launched in November 2014, it was highly anticipated that the cross-border trading system would help narrow the price gap between A and H shares.
However, until now A shares are still trading at about a 40 per cent premium to their Hong Kong-listed counterparts.
The big gap remains even after a 22.65 per cent slump in the benchmark Shanghai Composite Index in January, the biggest monthly drop since October 2008.
Ordinarily, H shares’ huge discount to A shares should prove attractive to mainland investors who could own the Hong Kong-listed shares via the stock connect scheme, the qualified domestic institutional investor (QDII) and qualified domestic limited partner (QDLP) programmes.
The QDII scheme allows mainland institutions to raise funds from local investors before converting them into foreign currencies for purchases of overseas-listed shares, while QDLP lets offshore hedge funds raise capital from mainland investors to buy shares abroad with currency conversion.
Brokers said mainland investors were showing a lukewarm response to the A-H share price difference, believing they could instead take advantage of the market volatility to make profits.
“A sharp fall in January is to be followed by a rebound in February,” said Feng Tao, a Shanghai-based retail investor. “I would prefer to play stocks at home rather than investing abroad.”
As of Friday, the Shanghai benchmark had rebounded 4.5 per cent in February.
I would prefer to play stocks at home rather than investing abroad
The majority of individual investors on the mainland either have been stuck in heavy paper losses or have already lost years of savings following a market rout that started mid-June last year.
The Shanghai indicator is still 45 per cent off the close on June 12, 2015.
Mainland investors would gauge the market’s liquidity status before making investment decisions.
When the market is mired in a liquidity drain, they would flock to small-cap stocks because their prices could be easily driven up or knocked down.
The mainland securities regulator has been trying to educate retail investors – whose trading value represented about 80 per cent of the total turnover on the Shanghai and Shenzhen exchanges – to buy shares on valuation, rather than rumours.
“It’s no easy job,” said Haitong Securities analyst Zhang Qi. “Mainland investors care about whether there are chances for making money, but are unaware of the basics of the stock market.”
Tony Hsu, chief investment officer of OTS Capital Management, said there were a number of companies in Hong Kong that were trading at very attractive valuations.
When the Shanghai-Hong Kong stock connect began, financial regulators initially earmarked a total of 250 billion yuan in southbound trading quota for mainlanders who met the minimum 500,000 yuan requirement.
It was expected that the quota would be fully used in the following months as investors actively bought into companies which had huge price gaps between A and H shares. Regulators even promised to increase the trading quota if southbound trading turned out to be explosive.
Local media reported that regulators were mulling a plan to double the total southbound trading quota. However, lacklustre interest in Hong Kong-listed shares dashed hopes for active southbound trading despite the scheme offering a good arbitrage opportunity.
“Few mainland investors really understand the arbitrage opportunity offered by the stock connect scheme,” said Tan Jialong, assistant to the chairman of Zendai Group in Shanghai, who is also director of the group’s hedge fund businesses. “In the long run, the price gap between A and H shares could be narrowed amid China’s full liberalisation of yuan’s capital account.”
