Alibaba (NYSE:BABA) – Yuan pricing for mainland China buyers could push Hong Kong stocks higher

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Key Jtake away food :

  • Hong Kong and mainland equity regulators will create a mechanism for mainland Chinese to buy Hong Kong stocks using Chinese yuan through an existing login program
  • The new arrangement could boost overall trade in Hong Kong by making it easier for mainlanders to buy Hong Kong stocks, which are now denominated in Hong Kong dollars.

By Lau Ming

An 8-year-old program allowing mainland Chinese to buy shares in Hong Kong could soon have grease, as regulators on both sides of the border discuss a plan that would allow mainlanders to pay for transactions in using their local currency, the yuan. If implemented, such a plan could provide a major jolt of liquidity for the Hong Kong stock market, where all transactions are currently limited to the local currency, the Hong Kong dollar.

Hong Kong Finance Secretary Christopher Hui mentioned Monday that the highly autonomous region of China was about to start consultations with its mainland counterparts on such yuan-based pricing for the Shanghai-Hong Kong and Shenzhen-Hong Kong stock connection programs. Such a move would advance the broader goal of further integrating China’s A-share markets, which are largely closed to foreigners, and Hong Kong, which is a favored trading ground for Chinese stocks by international investors.

The two existing connect programs allow investors from the mainland’s two major stock exchanges, Shanghai and Shenzhen, to invest in the Hong Kong stock market. Since the launch of the Shanghai Connect program in 2014, more than 500 Hong Kong stocks have been made available for trading through the two channels. These include the large-, mid-, and small-cap components of the Hang Seng composite indices, as well as Hong Kong stocks listed on both the mainland and Hong Kong.

Stanley Chik, head of research at Bright Smart Securities, believes the pricing of the yuan will appeal to investors who may be interested in shares of dual-listed companies whose Hong Kong shares are trading at a steep discount to their mainland counterparts, offering a sort of arbitrage opportunity.

The Hang Seng China AH Premium Index which tracks these stocks remained above 130 points and reached 152 points at one point last year, implying that mainland-listed A-shares were valued at over 30% higher than Hong Kong-listed shares of the same companies. , and sometimes even 50% higher or more. But A-shares traded on the mainland and shares traded in Hong Kong for the same company are not convertible, and Chik doubted regulators would create space for major arbitrage activity in equity login systems.

Big discount on H shares

Many popular ETFs linked to popular gauges like the Hang Seng and CSI 300 indices are currently available in Hong Kong and the mainland, and so the Hong Kong product would not be very attractive to mainland investors, the official said. of asset management. company that issues yuan-based ETFs. As a result, only stocks that are not listed on continental stock exchanges, such as Tencent (0700.HK) and Ali Baba (NYSE: BABA), would likely appeal to mainland-based investors, including those looking to trade Hong Kong stocks in yuan.

The dual-currency arrangement could reduce stock spreads between the two markets by giving mainland investors greater access to Hong Kong shares of dual-listed companies.

An example of this is the Hong Kong-listed shares of blue chip stocks Life insurance in China (2628.HK; 601628.SH), which are over 60% undervalued to their Mainland A-share counterparts. This wide gap may be partly due to the lack of interest in the company’s shares in Hong Kong through the connection programs, as these mainland investors hold only 3% of Hong Kong-listed China Life shares. On the other hand, the difference is only 30% for China Pacific Insurance (2601.HK; 601601.SH), perhaps in part because mainland investors own far more than 20% of its Hong Kong-listed shares.

Hong Kong-listed shares of two other dual-listed shares, Awesome Wall Engine (2333.HK; 601633.SH) and Ganfeng Lithium (1772.HK; 002460.SZ), traded at discounts of 60% and 30%, respectively, to their A-share counterparts last year, attracting investors looking to profit from the difference. But mainland investors have sold the two companies’ Hong Kong-listed shares this year, dropping from 47% to 37% for Great Wall Hong Kong shares and 23% to 15% for Ganfeng. This shows that valuation discounts have little appeal, and investors are also looking at factors such as market conditions and the performance of individual companies.

Reduction of foreign exchange costs

One of the biggest draws to the pricing of the yuan will be lower foreign exchange costs for mainlanders buying Hong Kong stocks. Under the current regime, mainland investors must convert yuan into Hong Kong dollars to buy Hong Kong stocks. Brokerages also often take 3% of the market value as deposits to hedge against running out of money for settlement at the end of the day due to forex volatility. Thus, when the yuan is particularly volatile, the risks related to foreign exchange costs can be high. But allowing Hong Kong-listed stocks to be traded directly using the yuan will eliminate currency exchange risk and costs, which could help boost trading volume.

One of the most direct beneficiaries of increased trade volume would be the Hong Kong Stock Exchange(0388.HK). Last year, the exchange checked in a total of 9.3 trillion Hong Kong dollars ($1.2 trillion) in transactions through login systems, an increase of 70% over the previous year, and a daily transaction value of 41.7 billion Hong Kong dollars, an increase of 71%. Its income from schemes and other income combined jumped 41% to HK$2.72 billion, a record for the fifth consecutive year.

Currently, only a handful of the nearly 300 Chinese stocks listed in the United States have concurrent listings in Hong Kong. Many more may be eager to register in the city as they face greater radiation risks in the United States. This in turn could attract more investment from mainland China for companies that can enroll in the connection programs.

But Bright Smart’s Chik pointed out that retail investors on the mainland must meet certain criteria before they can invest through the connect schemes. And with many retail investors shut out of the market for failing to meet these criteria, the potential for additional transactions will also be limited, even with yuan pricing. Meanwhile, many institutional investors on the continent tend to seek long-term value by focusing on fundamentals and individual stock valuations. These investors are likely to take a closer look at any yuan pricing deal to determine whether it actually brings new benefits that justify more cross-border trade.

This article was submitted by an external contributor and may not represent the views and opinions of Benzinga.

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