China investors aiming at arbitrage profits make Hong Kong shares soar | Reuters

Domestic fund managers say they are seeking to exploit a

major pricing imbalance between the markets, the result of a

mainland rally that until now showed little sign of spilling

over into Hong Kong.

As a result, mainland-listed blue chips are now about

one-third more expensive than their Hong Kong versions – as

measured by the China-Hong Kong price premium index -

while Chinese dual listed small-caps trade at a premium of 10

times the cost of the same company’s shares in Hong Kong.

But this time may be different. In late March, China’s

securities regulator improved access, letting mainland mutual

funds invest in Hong Kong shares via the connector. Several days

later, China allowed insurers to buy shares listed on GEM.

* Previous attempts failed on tepid demand for HK shares

($1 = 6.1930 Chinese yuan)

* Chinese funds buying HK shares ahead of Shenzhen pilot

“Water flows downward. Hong Kong’s

Growth Enterprise Market(GEM) shot up over 10 percent

in the same period, its biggest weekly gain in nearly six years.

“There are not many good investment opportunities here, so

we would naturally want to hunt for new targets elsewhere,” he

said.

China’s 5 trillion yuan ($807.36 billion) mutual fund

industry is already getting into position.

Invesco Great Wall Fund Management Co is launching China’s

first actively-managed mutual fund to invest via the

Shanghai-Hong Kong Connect, describing the Hong Kong market as a

“gold mine”, and “a low-lying land” in terms of valuation.

Borsera Asset Management Co plans to launch a similar fund this

month.

PUMPING IN LIQUIDITY?

In the past, arbitrage opportunities proved a mirage. The

Shanghai-Hong Kong stock connect not only failed to narrow the

premium after its November launch but actually widened it as

Chinese retail investors declined to move money south.

Shanghai-based hedge fund manager Xia Xiaohui thinks such

price differences cannot last.

By Samuel Shen and Pete Sweeney

David Dai, Shanghai-based investor director at Nanhai Fund

Management Co, a hedge fund, said he would buy Hong Kong shares

in part because he thinks valuations on mainland exchanges are

overheated.

“With the two markets increasingly connected, this is an

obvious arbitrage opportunity.”

LARGE PRICE GAP

“With such a big price gap, why don’t I buy stocks in Hong

Kong, especially if it’s the same company?” said Xia, chairman

of Liuhe Capital, which has started buying Hong Kong stocks.

* Funds trying to arbitrage major price differences

“Regulators seem to be very supportive for local funds to

invest in Hong Kong and … there’s real demand and real

interest from local investors.”

SHANGHAI, April 8 Chinese funds are snapping up

shares in Hong Kong, betting that a link-up between the Shenzhen

and Hong Kong stock exchanges, and easier access for

institutional investors, will yield quick double-digit or even

triple-digit arbitrage profits.

This propelled the Hang Seng China Enterprises Index

up 5.8 percent, following a 6.43 percent gain last week, and

helped the Hong Kong exchange reach record volume on Wednesday.

Including Wednesday’s gains, China’s CSI300 index

has soared 92 percent during the past year while the Hong Kong

China Enterprises Index is up 29.8 percent.. So lowly-valued Hong Kong stocks are

becoming increasingly attractive to mainland investors,”

Borsera’s fund manager Zhang Xigang said, predicting that

China’s mutual fund industry would soon start pumping liquidity

into Hong Kong.

“The current huge valuation gap and the excessive liquidity

in mainland funds is raising interest in Hong Kong stocks,” said

UBS strategist Lu Wenjie, noting Chinese small-caps trade at

around 100 times earnings on average, compared with just 10

times for Hong Kong peers.

On Wednesday, Chinese investors used the entire 10.5 billion

yuan ($1.69 billion) daily investment quota for

buying Hong Kong stocks under the Shanghai-Hong Kong Stock

Connect scheme for the first time.

(Reporting by Samuel Shen and Pete Sweeney; Editing by Nachum

Kaplan and Richard Borsuk)

The mainland market is now seen as bubbly without growth,

while Hong Kong has value but lacks liquidity, he said.

* Investors see HK shares as less bubbly than mainland

stocks

Small caps expected to become eligible for mainland

investment when the Shenzhen leg of the stock connect opens -

anticipation is for this year – benefited even more