Investors hesitate before stock link

By Emma Dai (China Daily) Updated: 2014-07-29 06:50

Arbitrage opportunity

Despite all kinds of hesitancy, data point to an arbitrage opportunity. "Currently, A-shares are much cheaper than H-shares," said Lu Wenjie, strategist of UBS. "Average valuations of H-shares used to be 30 percent cheaper than their mainland peers, but now it's about 10 percent more expensive. The A-H premium is at record high."

Shanghai-HK link set to boost arbitrage gains for investors

Through train for equities to lift capital market sentiment

Hang Seng China AH Premium Index closed at 91.90 on Monday, which means an 8.1 percent discount for A-shares compared with H-shares on average. "Some blue chips on the mainland, such as banks and resources companies, are now 15 to 30 percent cheaper," Lu said. "The opportunity is great for these stocks to pick up. After the stock connect starts, we estimate valuations of A-shares to step up as much as 5 percent above their Hong Kong-listed counterparts.

"Besides, the existing QFII quota is tight and capital outflow still needs approval from the State Administration of Foreign Exchange," he said. "In comparison, the through train will be more convenient."

Asia Pacific investment strategist of Citicorp International Ltd Ken Peng said: "For overseas investors, low threshold is the key. You don't need a lot of money to participate in the through train. Most importantly, the A-H premium should not widen once the markets are connected.

"While one-third of Hong Kong-listed stocks are banks, nine in 10 State-owned, Chinese private companies mainly list on the mainland," he said. "We believe small cap stocks, especially in the healthcare and consumer sectors, will see capital inflows," he added. "When the overall situation improves, foreign investors will be happy to seek a return from this part of the world."