The “through train” that was meant to carry Chinese investors straight to the Hong Kong stock market looks well and truly delayed by the global market crunch. The proposal, which would have released steam from China’s red-hot market last year, is not this year’s solution to the pain Chinese investors are now facing from their plunging share prices.
So far this year, the main Shanghai Composite Index has lost 35% of its value, while the benchmark Hang Seng index in Hong Kong has shaved off 13%. This differential in performance has chipped away at the valuation premiums Shanghai-listed shares enjoy over the same shares listed in Hong Kong. As recently as January, the Shanghai A-shares traded at a premium of more than 100% to their Hong Kong listings. That’s been halved.
Overall, such convergence should be welcomed by Beijing. The premiums are a reflection of distortions in China’s fledgling capital markets—including tiny free-floats and controls on the flow of capital. The plan mooted last August to allow local Chinese to invest directly in Hong Kong stocks was meant to partially address this.
But Beijing has missed the boat to carry out this and perhaps other capital market reforms, some of which were touched on by US treasury secretary Henry Paulson while in Beijing last week.
The swift and sharp equity plunge makes any such move potentially disastrous for the nascent equity culture that has taken hold in China.
Sure, letting Chinese money flee Shanghai for Hong Kong might bring the valuations further into line, which has the additional benefit of reducing the speculative nature of the Shanghai exchange. But that would hurt A-shareholders disproportionately.
The A shares of big benchmark companies such as Petrochina Co. Ltd and Sinopec (China Petroleum and Chemical Corp.), for instance, have dropped 64% and 57%, respectively, from their 52-week highs. Opening the “through train” would inflict further damage. For shareholders, who have already seen nearly two-thirds of their investment evaporate, that would be a reform too far.