Across The BorderWill unlocking US$391b of non-tradeable Chinese H shares spur a bull run in Hong Kong?

When the Chinese regulators started a programme to float a massive number of non-tradeable shares in mainland-listed firms in 2005, the benchmark Shanghai Composite Index jumped by six folds in the following two years. Now more than a decade later, a similar shake-up is likely to hit Hong Kong’s stock market soon.

Two Hong Kong-listed Chinese companies, including ZhongAn Online P&C Insurance, will be chosen by the State Council to participate in the trial programme, the mainland’s Caixin magazine reported last week. In the trial, the shares held by substantial shareholders, currently unavailable for public trading due to the regulatory barrier, will be converted into ordinary shares that can be sold and bought on the secondary market.

While pessimists argue that the overhaul sets the stage for heavy insider selling from these firms by significantly increasing potential stock supply, investors including HSBC Jintrust Fund Management and East Capital see buying opportunities arising from it. The move would add further impetus to Hong Kong stocks – where the benchmark index is already the best performer among Asia’s major markets this year with a 32 per cent gain – by motivating big shareholders to do more to bolster share prices to eventually align their interests with public investors’, said these investors.

“Full circulation will prompt shareholders and listed companies to pay more attention to stock prices, better communicate with the market and take measures in response to what the market cares about,” said Cheng Yu, a fund manager investing in Hong Kong stocks at HSBC Jintrust in Shanghai.

“It’ll also boost the liquidity of relevant stocks and let them enjoy liquidity premiums.”

Cheng said he would continue buying shares of Hong Kong-listed Chinese companies as policymakers release more dividends through reform measures and the valuation of the stocks is still attractive.