Hong Kong shares power to decade high on H-share reform

Shenwan Hongyuan HK

02/01/2018 08:07

SHANGHAI, Jan 2 (Reuters) - Hong Kong-listed Chinese firms 
propelled the Hang Seng Index past the 30,000-point mark to a 
decade-high on the first trading day of the year, boosted by 
optimism H-share convertibility reform will fuel more momentum 
after a bumper 2017.  
    The Hang Seng China Enterprise Index  .HSCE , which tracks 
Hong Kong-listed Chinese companies, surged 3 percent after China 
unveiled on Friday a pilot scheme that would allow 
mainland-incorporated companies listed in Hong Kong to convert 
their non-tradable equity into free-floating H-shares.  
    Although the scheme would potentially increase share supply, 
investors largely interpreted the reform as positive as it would 
improve corporate governance and boost foreign interest in Hong 
Kong-listed Chinese companies. 
    Some even drew parallels to China's A-share ownership reform 
in 2005-2007, which was a prelude to the biggest bull market in 
China's modern history. 
    Currently, shares held by founders or major shareholders of 
Hong Kong-listed mainland firms are not eligible for trading on 
exchanges, "which is why major shareholders don't really care 
about valuation of their H-shares," said Zhou Liang, fund 
manager at Minority Asset Management Co, which invests in both 
China and Hong Kong stocks.  
    "But if their shares become tradable, they will pay 
attention to market valuations and have an incentive to improve 
operation efficiency."  
    Beijing Gaohua Securities Co, the Chinese partner of Goldman 
Sachs, estimates there are 2.6 trillion yuan ($400.3 billion) 
worth of non-tradable shares in 249 H-share companies, 
equivalent to 8 percent of Hong Kong's stock market. 
    The brokerage hailed the H-share convertibility scheme as "a 
milestone in China's capital market reform," comparing it with 
A-share ownership reform, which boosted market capitalisation of 
A-share companies after converting non-tradable state-owned 
shares into free-floating stocks during the 2005-07 period.  
    China will initially select up to three companies in the 
H-share convertibility pilot scheme.      
    Albert Xu, a Hong Kong-based analyst at brokerage Zhongtai 
International, said the reform would eventually lure more 
Chinese companies to list in Hong Kong, while also making 
H-shares more attractive to foreign investors. 
    "If there's more availability of shares to foreigners, who 
can exercise more control through increasing ownership, that 
would benefit share prices." 
    He pointed out that Chinese brokerages with operations in 
Hong Kong would benefit from the scheme, which would boost 
trading volume in H-shares, and generate more underwriting fees 
through an expected increase in Hong Kong listings. 
    On Tuesday, shares of Hong Kong-listed Chinese brokerages, 
including China Merchants Securities  6099.HK , Shenwan Hongyuan 
Securities  0218.HK  and Haitong Securities  0665.HK  posted 
solid gains. 
    China Unicom  0762.HK , reported to be among the first 
companies to join the pilot scheme, jumped more than 3 percent. 
    ($1 = 6.4947 Chinese yuan) 
 
 (Reporting by Samuel Shen and Brenda Goh; Editing by Jacqueline 
Wong) 
 ((samuel.shen@thomsonreuters.com;  +86 21 6104 1789; Reuters 
Messaging: samuel.shen.thomsonreuters.com@reuters.net)) 
 
Keywords: CHINA STOCKS/HONGKONG