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Connect program to deliver arbitrage aplenty

Emma Dai
Updated: Nov 18,2014 9:18 AM     China Daily

Although the flow of investment under the Shanghai-Hong Kong Stock Connect program is expected to help close the price gaps between Hong Kong-listed H shares and Shanghai-listed A shares in mainland enterprises, analysts remain confident there will still be arbitrage opportunities aplenty.

The Hang Seng China AH Premium Index, which tracks the average price gap between A and H shares of dual-listed stocks, closed 0.57 percent higher at 102.14 on Monday, meaning that of the total 67 companies listed in both Shanghai and Hong Kong, the average price premium of A shares was 2.14 percent over H shares. An index of 100 indicates total price convergence.

“When the average price gap is less than 10 percent, it will be relatively unattractive to arbitrage. But at the individual stock level, there are still opportunities,” said BNP Paribas in report published last week.

“We do not see any current instances where H shares are trading at significant premiums to their corresponding A shares, which implies the short-H, long-A chances are quite limited.

“However, the short-A, long-H opportunities could be significant.”

The opportunities lie in areas where H-share prices “could catch up” with those of their A-share peers and “gradually narrow the gap”, HSBC Holdings Plc said in a report.

The bank noted that the H-share price discount of the three dual-listed Chinese airlines has widened to around 25 percent from 10 percent on April 10, when Stock Connect was first proposed.

Shanghai-listed China Eastern Airlines and Air China shares traded at a 71.26 percent and 16.55 percent premium, respectively, over their H shares on Monday.

China Southern Airlines, Shenzhen listed, still presented a 45.72 percent discount H-share price.

In the industrial sector, meanwhile, H-share price discounts for companies such as railway and power equipment manufacturers remained high at above 30 percent.

For selected commodities companies, such as steel, aluminum, copper and gold, the discount on H-shares has also deepened since the Stock Connect go-ahead was announced.

Yanzhou Coal closed 78.42 percent higher in Shanghai than in Hong Kong on Monday, while Zijin Mining enjoyed a 61.66 percent premium on its A-share valuation.

Metallurgical Corp of China and Aluminum Corp of China traded with 53.51 percent and 49.81 percent premiums respectively.

The A-share premium of Dongfang Electric, a Chengdu-based power generator and builder, was static at 43.72 percent.

Zoomlion, the construction machinery manufacturer, traded 38.78 percent higher, whereas BBMG, the building materials supplier, was 54.32 percent higher in Shenzhen equity market.

Dominic Chan, an analyst at BNP Paribas, said that he did not expect the opportunities for arbitrage to last long.

“Investors on both sides still need time to build positions on the other side. But eventually, as the two markets are linked it will make no sense for large price gaps to exist. Investors need to take profit as soon as possible.”