Chinese arbitrage opportunities sprout anew
04 April 2017
Short sellers are targeting Hong Kong-listed H-shares that trade at a premium to mainland-traded A-shares. IHS Markit’s Simon Colvin explains
Image: Shutterstock
Arbitrage opportunities that can be exploited by shorting Hong Kong-listed H-shares, which trade at a premium to a mainland-traded A-share issued by the same company, disappeared in the days since the Hong Kong-Shanghai Stock Connect launched in 2014—but there are indications that the trade may be coming back to life.
Four H-shares now trade at a premium to mainland-traded A-shares issued by the same company. This marks a notable turnaround for arbitrageurs given that every single H- to A-share cross in our database traded at a discount in the weeks following the onset of the Hong Kong-Shanghai Stock Connect.
The resurgence of arbitrage opportunities in H-shares is only a symptom of a wider momentum swing. These stocks slid from commanding a 20 percent premium to A-share on average to trading at a 30 percent discount in the months surrounding the launch of the Hong Kong-Shanghai Stock Connect. That discount has since fallen by two thirds as H-shares are now trading at an 11 percent discount to corresponding A-shares on average. Most of this conversion can be attributed to the yuan’s recent fall, which has driven up the value of H-shares relative to their mainland-traded peers.
The number of H-shares trading within 5 percent of their corresponding A-share peers has also jumped significantly in recent months, which could open up further arbitrage opportunities in the coming weeks should the rapid conversion seen recently overshoot. Whether any of the six H-shares, which trade within 5 percent of their mainland peers will trade at a premium remains to be seen, but the momentum is definitely on the side of the asset class as no H-shares commanded less than a 5 percent discount to their corresponding A-shares in early February.
Anhui Conch Cement leads the way
Short sellers have been more than eager to take advantage of this trend as the four relatively overpriced H-share listings have 7.1 percent of shares out on loan on average, which is over twice the average seen by H-shares.
Building supply firm Anhui Conch Cement, whose 15 percent H-share premium is the widest of the four, also attracts the most arbitrageurs as it has 14 percent of its shares out on loan, the most out of any H-share.
Arbitrageurs have benefitted handsomely from Anhui Conch’s previously, as more than a quarter of the company’s shares were out on loan back in 2014 when its H-shares went from commanding a 70 percent premium to trading at a 10 percent discount in a little over 12 months.
Engine manufacturer Weichai Power is also rapidly attracting arbitrageurs as the ratio between its H- and A-shares rose from 60 percent to 110 percent over the last two months. Short sellers jumped on the trend shortly after H-shares started to trade rich to their mainland-traded cousins and more than 11 percent of Weichai shares are now on loan to short sellers, the most since the days before the Hong Kong-Shanghai Stock Connect in 2014.
Four H-shares now trade at a premium to mainland-traded A-shares issued by the same company. This marks a notable turnaround for arbitrageurs given that every single H- to A-share cross in our database traded at a discount in the weeks following the onset of the Hong Kong-Shanghai Stock Connect.
The resurgence of arbitrage opportunities in H-shares is only a symptom of a wider momentum swing. These stocks slid from commanding a 20 percent premium to A-share on average to trading at a 30 percent discount in the months surrounding the launch of the Hong Kong-Shanghai Stock Connect. That discount has since fallen by two thirds as H-shares are now trading at an 11 percent discount to corresponding A-shares on average. Most of this conversion can be attributed to the yuan’s recent fall, which has driven up the value of H-shares relative to their mainland-traded peers.
The number of H-shares trading within 5 percent of their corresponding A-share peers has also jumped significantly in recent months, which could open up further arbitrage opportunities in the coming weeks should the rapid conversion seen recently overshoot. Whether any of the six H-shares, which trade within 5 percent of their mainland peers will trade at a premium remains to be seen, but the momentum is definitely on the side of the asset class as no H-shares commanded less than a 5 percent discount to their corresponding A-shares in early February.
Anhui Conch Cement leads the way
Short sellers have been more than eager to take advantage of this trend as the four relatively overpriced H-share listings have 7.1 percent of shares out on loan on average, which is over twice the average seen by H-shares.
Building supply firm Anhui Conch Cement, whose 15 percent H-share premium is the widest of the four, also attracts the most arbitrageurs as it has 14 percent of its shares out on loan, the most out of any H-share.
Arbitrageurs have benefitted handsomely from Anhui Conch’s previously, as more than a quarter of the company’s shares were out on loan back in 2014 when its H-shares went from commanding a 70 percent premium to trading at a 10 percent discount in a little over 12 months.
Engine manufacturer Weichai Power is also rapidly attracting arbitrageurs as the ratio between its H- and A-shares rose from 60 percent to 110 percent over the last two months. Short sellers jumped on the trend shortly after H-shares started to trade rich to their mainland-traded cousins and more than 11 percent of Weichai shares are now on loan to short sellers, the most since the days before the Hong Kong-Shanghai Stock Connect in 2014.
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