Okay, so I’ve been looking at the price differences between SH and HK shares for weeks now, wondering how far this goes, and when/if/how it corrects. Looks like Bloomberg finally wrote an article on it this morning, which sheds some light on things… http://www.bloomberg.com/news/2014-12-05/like-chinese-stocks-in-hong-kong-they-re-12-cheaper.html So you’ve got A-shares which are traded in Shanghai by citizens, and you’ve got H-shares of the same company listed in Hong Kong. You would think if it’s the same company on both exchanges, they would trade at a similar price. For example I own Samsung “half shares” on the London exchange 579USD, and they also trade on the Korean exchange at 1,302KRW…as one would expect given exchange rates. But not so between HK/SH. It’s a total cluster! You can see the chart for ASHR ETF (A-shares), and FXI ETF (H-shares). They more or less track until November, then suddenly the A-shares are up 41% vs 8% YTD. To give an example of a specific company: Shanghai air is 26% more expensive in SH than HK. Hello, WTF? http://finance.yahoo.com/echarts?s=FXI+Interactive#{“range”%3A"1y"%2C"scale"%3A"linear"%2C"comparisons"%3A{“ASHR”%3A{“color”%3A"%23cc0000"%2C"weight"%3A1}}} Prior to seeing this Bloomberg article I was thinking of buying FXI (I already own ASHR) to gain/hedge if money starts flowing the other way. Now after this article I’m really wondering, how to profit from this? But it seems unclear given the weird Chinese setup. There’s a hell of a lot more Chinese than Hong Kongers, it’s new money entering the market, plus they are buying on margin, with falling interest rates, and the Chinese have some limitations investing in HK even if they wanted to…so I wonder when/if/how this corrects? Thoughts?
This is pretty interesting. I feel like there must be restrictions on banks performing arbitrage there. I’ve also never been more sure of an impending massive scale crash than signs like this with quotes like this:
Mainland shares “are dominated by retail investors, who don’t pay too much attention to fundamentals such as valuations,” Lu Wenjie, a Shanghai-based strategist at UBS Group AG, said by phone yesterday.
Retail holders can be panicky. At some point there’s a pretty big risk of collapse.
Not sure there is any actual way to directly arb, at least I can’t think of a way. You can’t, to my knowledge, buy a cheap H-Share, and go trade it for an expensive A-share. I’m pretty psyched because today I figured out how to buy A-shares directly thru my broker (IB) using the SH/HK Link, and H-shares too. Pulled up Pudong Development Bank, bid/ask in RMB, also showing USD equivalent, P/E ratios, financials, analyst recommendations. Around $9 on a $10K trade, I’m like a kid with a new toy! By the way, of the top 10 A-shares only 4 of 10 have P/E ratios over 10 (even after this massive run up). The retail investor’s behavior is irrational, but I won’t call it a bubble until the Shanghai Composite doubles to 6000.
True, I haven’t looked at it too closely. Those were just my initial thoughts, although I am a bit of a perma-bear as of late. I think you’d basically have to trade the spread indirectly by maybe buying a future on one index and selling a future on the other, maybe lever up and go all LTCM.
It’s A-share frenzy over here. Read financial statements all Sunday, and bought up a bunch of thru the HK/SH link this Monday morning. I’m already loaded; Ping An Insurance up 10% by close, SIAC Motors up 5%, Qingdao up 3%, now it’s morning in NY and my ASHR ETF is way up too. Also bought a bunch of banks. ICBC Bank is the largest bank in the world, pays a 5.7% dividend (it was even higher prior to the stock being bid up), rated BBB. When comparing China’s big 4 banks with US banks, I actually thought the China banks were better in almost every way.
Goldman had this to say about arbitrage in a recent report:
------------------- “It is difficult to predict in which direction the gaps may converge (i.e. whether A falls or H rises, or a combination of both). Specifically, there are 4 possible ‘arbitrage’ scenarios: 1. Offshore investors sell the overvalued H and buy the undervalued A (large-cap sectors like Financials and Energy). They may be incentivized to switch (assuming they already have positions on H) but it depends on how high the switching costs (transaction cost and market impact) might be. We think select well-held offshore names could be disproportionately impacted by these arbitrage flows. 2. Offshore investors buy small-cap H shares (most are not well covered with thin liquidity) and go short their expensive A-share counterparts, which practically speaking is difficult to execute. 3. A-share investors go short the expensive large caps in HK and buy the undervalued A shares in China, which doesn’t conform to their investment style. 4. A-share investors buy undervalued small-cap H, funded by their A shares, which appears the most plausible scenario to us among the four.” ------------------- Also found this CFAI paper on the subject, but too quanty for me. http://www.cfainstitute.org/learning/products/publications/contributed/equityinvestments/Documents/rf_dual-listed-shares-and-trading.pdf
Historically the A-share market is very retail dominated. You should expect that investor base to be more likely to chase returns as institutional money flows in and drives up prices. It’s pretty simple to see. When a market is made more liquid due to a change in government policy (as was the case in November 2014) the previous liquidity premium does away and stocks are driven up.
The gap between A and H shares will close. “Smart” institutional money will arb it away as soon as they’ve built up enough A shares (remember most offshore desks had zero inventory until less than a month ago).
Shanghai A-shares (CSI-300) up 2.7% today, amid global market chaos. It has almost reclaimed the peak it hit a couple weeks ago, making $$$.
This bad boy is the last of the uncorrelated markets!