China May Allow Investment Into Hong Kong Shares

by Mary Swire, Tax-News.com

13 March 2002

After news broke yesterday that Beijing might be about to allow mainland investors to put money directly into Hong Kong H shares (mainland companies listed in Hong Kong but whose shares are off limits to mainland investors), investors drove H-share prices sharply higher, ignoring warnings from investment banks not to make too much of the news.

H shares rose 2.9%, led by companies with A-share listings in the mainland. The two mainland brokerages listed in Hong Kong, First Shanghai and Shenyin Wanguo, both surged more than 16%.

People's Bank of China governor Dai Xianglong on Monday said it would look into allowing mainlanders to invest in Hong Kong's market. Mainland investors like H shares because they are more familiar with them - 26 of the 59 mainland enterprises listed in Hong Kong have A-share listings in China. Indeed, it is thought that much investment in H shares comes from illegal foreign exchange balances held by mainlanders.

When news broke a year ago that Chinese investors would shortly be allowed to buy Shanghai- and Shenzen-listed B shares (equivalent to H shares), the index of Hong Kong-listed H shares jumped 5% to 411, reflecting a belief that the H-share market would be similarly relaxed. Since then the average multiple for H shares has doubled. However, domestic markets (including A shares) trade on an average 40 times forward earnings multiple, compared with fewer than 10 times for H shares, a gap that would partly or wholly close if barriers to investment were lifted.

Any change in the rules is not likely before the Chinese Communist Party's 16th general session in September, in which Jiang Zemin is expected to hand over the party leadership to Hu Jintao, and would probably be accompanied by a move to allow freer investment in mainland markets, perhaps by allowing foreign funds to market their products in the mainland.

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