China stock market

China kicks off H-share full circulation trial as Legend picked in pilot programme

PUBLISHED : Friday, 20 April, 2018, 5:33pm
UPDATED : Friday, 20 April, 2018, 11:04pm

China has officially started a pilot programme allowing the bulk of shares in Chinese companies listed in Hong Kong to trade freely on the stock market, a move that will triple the current market cap of H shares and align interest between investors and owners.

Legend Holdings will be taking part in the trial known as the full circulation of H shares, the China Securities Regulatory Commission said on Friday, without announcing the actual date.

The programme will enable major shareholders in these companies to convert their non-tradeable stocks into ordinary shares that can be bought and sold like common shares on the exchange.

The move has set the stage for a spike in values of the stocks held by big shareholders of the H-share companies, after a gauge of these mostly state-owned companies surged 25 per cent last year.

Once fully converted, the non-tradeable shares of the 250 H-share companies would be valued at HK$2.6 trillion (US$410.9 billion), adding to the current market values of HK$1.1 trillion, according to Citic Securities. The reform can roughly boost the total market cap of Hong Kong stocks by 8 per cent, the brokerage said.

China’s securities regulator has limited the pool of available shares to those that were floated in initial public offerings.

Shares owned by founding and controlling shareholders are deemed ineligible for public trading.

Some market analysts caution that the status shift will significantly increase the supply of tradeable shares on the Hong Kong market, potentially jeopardising the bull sentiment.

However, other strategists say the move will boost the liquidity, allowing more foreign participation, and align the interest of big shareholders with small investors.

“Good-quality H shares will see conspicuous improvement in liquidity and they will probably attract more attention and investment,” said Citic Securities analysts Yang Lingxiu and Qin Peijing. “Big foreign institutions are not able to be deeply involved in these companies because of their pretty small weighting in indexes.”

The Hang Seng China Enterprises Index of 40 major H-share companies is valued 9.4 times earnings, about a third cheaper than the benchmark Hang Seng Index, according to Bloomberg data.

In 2005, mainland stock markets went through a similar overhaul, converting non-tradeable shares held by big shareholders into free-floating ones. The shake-up sparked an unprecedented bull market, driving up the Shanghai Composite Index six fold within three years.

Shares of Legend closed at HK$24.90, down 3.9 per cent on Friday before the announcement.