Something of a green alert over in Shanghai. The stock market was soft again in the morning - for the fifth day in a row - as sentiment stayed weak.
Green because, as Tom Mitchell explains in Tuesday’s FT, on the mainland China bourse shares appear in red if they are rising, and green if they are falling. Near neighbour Hong Kong has precisely the reverse.
In any case, the resilient Shanghai Composite clawed its way back to finish the day up 106 points at 5,773.39. But red-green colourblindness is the least of the two markets’ challenges.
Chatter last week about a possible share swap mechanism, state-sponsored arbitrage if you will, boosted Hong Kong shares and depressed those on the mainland. Hong Kong’s rally has narrowed the gap between its H-shares and China’s A-shares - now 55 per cent on a weighted-average basis.
But how such ‘red arb’ would be possible, given China’s strict capital controls, whch make it impossible for mainland investors to buy shares freely in Hong Kong and vice versa, remains in dispute, says Mitchell. Some argue that A-share valuations will moderate as Chinese corporate earnings rise and new share supply is increased, while institutional investor quotas should support a continued rerating in Hong Kong. The premium should narrow of its own accord.
The Lex column meanwhile thinks that arbitrage between different Chinese share classes is right up there with slimming chocolate: fervently desired and highly unlikely.
China has little to gain from such a move - issuers’ ability to raise cheap equity at home would be curtailed, and there is still a string of issuers waiting to “come home” by listing in Shanghai.
