Cross-border trading fails to close the gap between A and H shares
Little arbitrage between Hong Kong and Shanghai markets
The wide gap between the A shares in Shanghai and H shares in Hong Kong shows the one-year-old stock connect scheme has not offered arbitrage opportunities for the two markets due to regulatory differences.
The Hang Seng China AH Premium Index, which tracks the difference in share prices of companies listed in both Hong Kong and on the mainland, closed at 141.93 on Tuesday. This means A shares listed in Shanghai and Shenzhen are, on average, trading at a premium of 41.93 per cent compared with their H share counterparts in Hong Kong. The record high since the index was launched in 2008 occurred in September last year, when it hit 149.03.
Before the stock connect scheme was launched in November 2014, the index on one occasion dropped to 100, meaning that, on average, the A and H shares were trading at similar prices. That was because many market players believed cross-border trading, allowing mainland investors to trade Hong Kong stocks via the Shanghai Stock Exchange and letting international investors trade Shanghai-listed A shares, would open up arbitrage opportunities and narrow the price gap. However, since the launch of the scheme the index has kept rising.
The spread between A and H shares has widened in large part due to the vastly different underlying investor base
Louyang Glass has the widest gap, with its H shares closing at HK$4.08 on Tuesday, while its A shares closed at 24.07 yuan (HK$28.55) in Shanghai. Sinopec Oil Services H shares closed at HK$1.82 while its Shanghai-listed A shares closed at 6.35 yuan.
“The spread between A and H shares has widened in large part due to the vastly different underlying investor base, coupled with the pressure on H shares driven via the dollar peg,” said Brett McGonegal, co-chief executive of Reorient Group.
He said the A-share market was predominantly driven by retail investors while the H-share market had a much bigger institutional base.
“As the recent market turmoil has played out, the institutions have taken more of a sell now and take a look later [approach]. The retail investors have been more daring in sticking with the A-share names and more importantly shifting in a flight to quality out of more speculative names into larger-cap names that also have H-share listings,” McGonegal said.
“This action has resulted in a widening gap as H shares are being sold and compressing prices while their A-share counterparts are most often the beneficiary of stock rotation into large-cap, less-volatile names.”