Hong Kong Exchanges & Clearing has confirmed to Euromoney that it has set up a working group jointly with the Shanghai Stock Exchange “to review the arrangements for simultaneous listings”.
A spokesman for HKEx paints a positive picture of what the ICBC listing achieved, saying it “further demonstrated the strength of the H-share market [Chinese entities listing in Hong Kong] in terms of fund-raising capacity” and that it “showed regulators and exchanges in Hong Kong and on the mainland are committed to cross-border cooperation”.
But he also conceded: “There may be areas where better coordination between the two markets would facilitate more efficient information flow between them – such as trade suspension in one market.”
There are, after all, complications inherent in a simultaneous listing on two markets with very different stances on international access, currency convertibility and regulatory requirement.
The big issues have to do with trading suspension, corporate information disclosure and settlement systems. The suspension issue has been a matter of concern since June, when shares of Sinopec Shanghai Petrochemical – one of 33 companies to be listed in both Hong Kong and Shanghai – were suspended from trading in Shanghai an hour before the same stock was suspended in Hong Kong. At the time HKEx defended the delay by saying news affecting Shanghai-listed stocks did not necessarily affect those traded in Hong Kong. However, it is clear that a common suspension mechanism would be desirable.
Both exchanges are keen to put their lessons into practice quickly because many other mainland companies are expected to follow the ICBC model, with China Communications Construction Company expected to be next.
One curiosity of the listing was that the share prices in the different markets did not converge, as some had predicted, but instead behaved differently. In Shanghai the stock opened 9% above its IPO price, in Hong Kong, 17.3% higher; they closed on their first day up 5.13% and 14.66% respectively. The trend was the same – running hard at the opening and softening in the afternoon – but the levels differed more than had been expected. Almost five times as many H-shares changed hands as A-shares.
One reason for it is thought to be the higher level of institutional participation in Hong Kong. And since the A-share market is not fundable there is limited arbitrage between the two: a fall in A-shares might cause holders of the H shares to sell, but it doesn’t create an automatic mechanism for one price to mirror the other. Also there is less money on the mainland to invest, since it’s a closed market with limited foreign fund access. Convergence is only likely to follow as quotas of qualified foreign institutional investors increase.
Less investor ardour
It’s also true to say that domestic investors don’t necessarily have the Hong Kong view that all IPOs shoot the lights out – because in recent years, on the mainland, they very often haven’t. Similarly, local Chinese, the customers of these listed banks, don’t always share the ardour for them that foreign investors have.
While many see the divergence as just a curiosity, one person who doesn’t is Joseph Yam, who heads the Hong Kong Monetary Authority, Hong Kong’s central bank. In an open letter published on the HKMA’s web site in November he said “the price differential between the H-shares and the A-shares remains and needs to be addressed... the partitioning of a market trading essentially the same financial instrument with the same shareholders’ rights undermines the efficiency of the market.”
Yam proposed that this partition could be removed without undermining China’s foreign exchange controls. “The two classes of shares can be made directly fungible, or indirectly fungible by trading depository certificates evidencing the holding of shares in the other market.” He suggested an arbitrage arrangement could be established to allow price equalization, possible involving China’s State Administration of Foreign Exchange and conducted on a non-profit basis by a newly established public organization “conducting arbitrage whenever a significant exchange-rate-adjusted price differential appears.”
As a general rule among dual-listed companies, big-name heavyweights such as Bank of China tend to trade at a premium in Hong Kong, while smaller companies trade at a premium on the mainland.