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New Shanghai, HK indexes pave way for risk products
2007-06-29
HONG KONG - Indexes tracking shares listed in both Shanghai and Hong Kong, introduced on Friday, pave the way for derivatives products that will allow investors to play movements in the two markets, analysts said. For foreign investors, Hong Kong's stock market is the main way to play China's booming growth story. But China's closed markets and lack of investment choices mean Shanghai shares trade at a huge premium to those of the same firms listed in Hong Kong. The new gauges underscore the growing influence of the mainland bourse on the city's equity market, as rising numbers of H-share companies, or mainland-Chinese registered companies listed in Hong Kong, seek Shanghai listings. HSI Services Ltd., manager of Hong Kong's benchmark Hang Seng index , said on Friday that a series of Hang Seng China AH indexes would launch July 9. The Hang Seng China AH Premium Index would measure the price gap between the more expensive yuan-denominated A shares traded in Shanghai and Hong Kong's H shares. Three price indexes, the Hang Seng China AH (A+H) index, Hang Seng China AH (A) index and Hang Seng China AH (H) index, would track the price performance in the shares of the same companies. For details on the indexes, click: http://main.hsi.com.hk/hsicom/announce/20070629e.pdf. HSI Services foresees the index as a possible basis on which brokers could develop futures and other derivatives products. "The indexes would provide a reference for market practitioners to study and launch related derivatives products," said Vincent Kwan, HSI Services general manager. Many market professionals agree. "It will be useful to have some guidelines. If you see differences between the two markets, the next step would be to set up a proper way for investors to play the differences," said Winner Lee, an associate director with BNP Paribas. EXPLOITING BIG PRICE GAPS Hong Kong officials have long talked about the need for a platform to narrow the valuation gap between the A and H shares. But they have been sketchy on specifics. Meanwhile, investors have pondered ways to make money from the yawning price gaps between the A and H shares, but that is unfeasible in the short term because China's bourses are walled off to all but select foreign firms -- a function of the country's closed capital regime. Shanghai-listed shares are now roughly double their Hong Kong-listed counterparts. Top mainland insurer China Life, for example, trades at a 44-percent premium in Shanghai compared to its Hong Kong stock. Mainland Chinese shares have nearly doubled this year in ample liquidity, while Hong Kong's China Enterprise Index of mainland-registered H shares has returned 15 percent. There are now only extremely limited capital flows into markets in both directions: into China via the so-called Qualified Foreign Institutional Investor programme (QFII), and out of China and mostly into Hong Kong via the Qualified Domestic Institutional Investor (QDII) arrangement. For those institutional investors with access to mainland-listed shares, however "derivatives (based on the index) could help hedge against China's stock market," said Castor Pang, strategist at Sun Hung Kai Financial. Meanwhile, more H-share companies are seeking retroactive listings in the mainland, reinforcing the links between the two markets. Aluminum Corp. of China and shipping giant China COSCO Holdings are among the newest H-share companies selling shares in mainland China. Oil major PetroChina Co. Ltd. and China Construction Bank are among those expected to list in Shanghai later in the year. HSI Services signed a licensing agreement this week allowing it to pluck data from the Shanghai Stock Exchange and said it was now in talks with the Shenzhen Stock Exchange for a similar agreement.
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