It’s a real bubble
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.