It’s a real bub­ble

China Daily (Canada) - - FRONT PAGE -

When the Shang­hai-Hong Kong Stock Con­nect pro­gram was launched in Novem­ber last year, many stock an­a­lysts and in­vestors were en­thused by the ar­bi­trage op­por­tu­ni­ties pro­vided by the wide gap be­tween the prices of Hong Konglisted H shares and their Shang­hai-listed A-share coun­ter­parts.

To many in­vestors, buy­ing the lower-priced H shares seemed like a sure win be­cause they be­lieved that their prices would move up to nar­row the gap.

Fast for­ward to now. In­stead of nar­row­ing, the gap be­tween the low­er­priced H shares and the higher-priced A shares has ac­tu­ally widened, partly be­cause the main­land stock mar­ket has per­formed con­sid­er­ably bet­ter than its Hong Kong coun­ter­part in the past six months of so. The bench­mark Shang­hai Com­pos­ite In­dex has climbed a to­tal of 47.44 per­cent, de­spite oc­ca­sional fal­ter­ing, since the be­gin­ning of this year, com­pared to a 16.26 per­cent in­crease in Hong Kong’s Hang Seng In­dex over the same pe­riod.

De­spite the re­port­edly large flow of cap­i­tal from the main­land into the Hong Kong mar­ket, mak­ing money on the ex­pected price con­ver­gence of H and A shares of main­land en­ter­prises has re­mained an elu­sive goal. Many A shares are trad­ing at a hefty pre­mium of more than 60 per­cent over their H-share prices. Of the 84 H shares listed on the Hong Kong Stock Ex­change, no more than five are trad­ing at near par­ity or at a slightly higher price than their A-share coun­ter­parts.

The dis­par­ity may have shown up the bal­loon­ing bub­ble of the main­land stock mar­ket, which has been feed­ing on a largescale in­fu­sion of liq­uid­ity over the past sev­eral months, with the cen­tral bank be­com­ing in­creas­ingly open and ag­gres­sive in pur­su­ing a loose mon­e­tary pol­icy to stim­u­late eco­nomic growth.

Although the cen­tral bank re­it­er­ated that it has no in­ten­tion to pur­sue a Western-style quan­ti­ta­tive eas­ing pol­icy, it has pumped huge amounts of liq­uid­ity into the bank­ing sys­tem by low­er­ing banks’ re­serve re­quire­ment and cut­ting in­ter­est rates on sev­eral oc­ca­sions.

A sub­stan­tially large por­tion of the funds had been chan­neled into the stock mar­ket at a time when main­land stocks were widely seen to be woe­fully un­der­val­ued with the av­er­age mar­ket mul­ti­ple fall­ing to less than 15 times. The sub­se­quent rally, which be­gan to take off late last year, has pushed up prices of stocks across all sec­tors to lev­els that are seen by more and more stock an­a­lysts to be un­sus­tain­able.

More wor­ri­some to an­a­lysts and reg­u­la­tors is that a large por­tion of the much in­creased daily turnover on the Shang­hai Stock Ex­change was funded by stock­bro­kers’ loans in the form of mar­gin trad­ing. To clamp down on ex­ces­sive spec­u­la­tion, the watchdog agency ear­lier in June in­tro­duced stricter rules on mar­gin trade.

The move trig­gered a flash crash, send­ing the lead in­di­ca­tor into its big­gest weekly fall in seven years. The mar­ket re­cov­ered the fol­low­ing week, but the shock has served as a re­minder to stock­bro­kers and in­vestors that the stock mar­ket bub­ble is real and that the rally lacked the sup­port of eco­nomic fun­da­men­tals. The au­thor is a se­nior fi­nan­cial editor at China Daily Hong Kong Edi­tion.

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