After the official Chinese news agency Xinhua confirmed yesterday that Chinese investors would shortly be allowed to buy Shanghai- and Shenzen-listed B 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. Most H shares currently trade at PEs of ten times or less, compared with PE ratios in the 40s or 50s for many A shares (which are the only ones Chinese residents have been allowed to buy until now).
The over-heated market for A shares, and the existence of $110 bn in external balances held by Chinese residents, which can't legally be used to buy any type of Chinese shares, have put pressure on the Chinese authorities to begin dismantling the barriers between the different markets. It is expected that they will merge eventually into just one large, national stock market.
Yesterday's announcement said that the China Securities Regulatory Commission was finalising details of a policy to allow individual Chinese investors with legal foreign exchange accounts to buy shares in the 114 companies listed on the B-share markets in Shanghai and Shenzhen.
In fact, the situation is not as clear-cut as it seems, since Chinese investors already use regulatory loopholes to trade in B shares, and are thought to be responsible for a majority of trading in Shanghai, and an unknown proportion of Shenzen trading. B share prices are low at present partly because of lack of liquidity, but also because of regulatory tightening up which has cut price manipulation. This in itself is another good reason for the Chinese to move more quickly towards a larger, more transparent market-place.
The B share markets are currently closed, and will no doubt see a surge of buying when they re-open, probably on Monday. 76 of the 114 B-share titles also have A-share listings, yet the B shares tend to trade at barely 10% of their A-share valuations.
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