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Premium of China shares over Hong Kong counterparts hits 5-month low


[SHANGHAI] The premium that shares on Chinese markets have to their Hong Kong counterparts shrank to a five-month low on Thursday, as foreign investors stepped up bargain hunting in Hong Kong, betting that China's economy is stabilizing.

The Hang Seng China AH Premium Index, which tracks the price differences between dual-listed companies in China and Hong Kong, fell for the seventh straight day to 131.5, the lowest level since early November.

That means mainland-listed A-shares are on average 31 per cent more expensive than Hong Kong-listed H-shares. Three months ago, the premium was nearly 50 per cent.

Fund managers said a recent slew of encouraging data from China, including upbeat March trade data, has led foreign investors to increase their China exposure via Hong Kong, pushing the Hang Seng index to three-month highs on Thursday.

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"We recently saw a pick-up in economic data in Q1, marginal recovery of corporate earnings and currency stabilization," said Caroline Yu Maurer, head of Greater China equities for BNP Paribas Investment Partners.

"Given Hong Kong is quite underweight by global investors, we probably have seen some position neutralization moves," she said.

Foreign interest in China assets could rise further, aided by market-friendly policies including the planned launch of the Shenzhen-Hong Kong Stock Connect and efforts to get mainland-traded A-shares included by an MSCI index, HSBC said in a report last week.

In the report, HSBC said it preferred H-shares to A-shares, partly because valuations of Hong Kong-listed China companies "remain cheap".

The long-standing share price gap between China and Hong Kong, partly the result of regulatory differences and Beijing's strict capital controls, is attracting an increasing amount of arbitrage interest.

Deutsche Asset Management last month launched an exchange-traded fund (ETF) that aims to capture price differential between A-shares and H-shares.

The HSCE index, which tracks H-shares, trades at 7.2 times companies' earnings, compared with an earnings multiple of 15.3 for China's blue-chip CSI300 Index. Dow Jones Industrial Average has a price/earnings ratio of 18.3.

Hong Kong shares have strengthened as overseas buying of emerging Asian equities and bonds surged to the highest level in five years in March, partly aided by a weaker dollar.

But reflecting some profit-taking from mainland investors, the Hong Kong market on Wednesday saw its first net outflows in six months under the Shanghai-Hong Kong Stock Connect scheme.