H-Shares Marching On

Excerpts from The Standard HK news daily: Millions could plow their money into the Hong Kong securities market following a trial initiated yesterday by the mainland to allow individuals to invest in stocks traded on the bourse. The decision by the State Administration of Foreign Exchange came just days after a Beijing visit by a top-level delegation led by HK Financial Secretary John Tsang Chun-wah. The pilot program will solidify Hong Kong's status as an international financial center and will help narrow the huge price gap between mainland-traded A shares, which trade at extremely high earnings multiples, and Hong Kong- listed H shares, which trade at relatively lower earnings. The move is also in keeping with initiatives outlined in the Action Agenda on China's 11th Five-Year Plan and the Development of Hong Kong.

SAFE earmarked Tianjin's Binhai New Area for the trial run. In a statement on its website yesterday, the forex regulator designated Bank of China's (3988) Tianjin branch and its Hong Kong-based securities arm BOC International to handle transactions. All mainland citizens will be allowed to invest and it is not limited to residents of northern Tianjin.

Welcoming the initiative, Financial Secretary Tsang said it demonstrated the mutually assisting, complementary and interactive relationship between the financial systems of the mainland and Hong Kong. Hong Kong Monetary Authority chief executive Joseph Yam Chi-kwong said the program was conducive to the interaction and the mutual development of Hong Kong and mainland financial markets.

But why Tianjin only? By designating a specific branch to facilitate the flow of funds will allow authorities to monitor foreign currency transactions first , soon we will see the program being replicated throughout the major cities in China as long as the "outflow and inflows can be monitored properly". This will fundamentally change the dynamics of the Hong Kong market. Needless to say, this is one of many steps taken to create release valves for the liquidity swishing in China's financial system.

Hate to repeat it again, but H-shares was, is and still will be the best asset class before, now and over the next 12 months. Until now, mainland citizens were only allowed to invest overseas through banks, brokerages, insurers and fund managers licensed as part of the qualified domestic institutional investor program. SAFE said individual investors will not be bound by a rule that restricts forex purchases to US$50,000 (HK$390,000) annually. Investors may convert unlimited yuan into foreign currency and invest in Hong Kong. They could also retain their foreign currency earnings.

It is thought that the new plan could boost daily turnover for H-shares by 10%-20%. I expect an even greater rate of participation as this scheme allows the mainland Chinese to pick up Chinese shares at a great discount buffer since most of them will have to have a Shanghai listing within the next 2 years. Petrochina will be the first.