Government Denies plan to swap shares listed Hong Kong and mainland stock exchange

The central government denied on Thursday that it was studying a plan to

allow swaps of shares of companies listed both in Hong Kong and the

mainland after reports of such a scheme doused Shanghai's red-hot market

and lifted Hong Kong shares to record highs.


Share valuations in Shanghai have raced ahead of prices in Hong Kong this

year, with many dual-listed companies commanding twice the price north of

the border. But the growing disparity raises fears of a bubble and begs

the question of how the valuation gap will be closed if the mainland's

market is to open up.


Deputy securities regulator Tu Guangshao on Wednesday said officials were

studying the idea of share swaps, although he did not elaborate. Senior

Hong Kong officials have been advocating an arbitrage mechanism for almost

a year.


But a spokesman for the China Securities Regulatory Commission later said

there had been a misunderstanding and Mr Tu had been referring to a

putative exchange of equity between stock exchanges in the mainland and

Hong Kong, not a share swap scheme.

Adding to the confusion, a top banker earlier appeared to confirm the

existence of a plan.


Adding to the confusion, a top banker earlier appeared to confirm the

existence of a plan.

"It is still at the study stage and there's still quite a long way to go

before it is operational," Bank of Communications (SEHK 3328) chairman

Jiang Chaoliang told reporters during the Communist Party Congress on

Thursday.


"The regulators have asked us for our opinions."


The A-share H-share premium index, showing the difference in prices of

shares listed both exchanges, fell almost 5 per cent on Thursday as

H-shares rallied and A-shares swooned.


"A share swap, or even the likelihood of it, would be a big blow to the

market as it means A shares, which are overvalued, would slump to the

levels of H shares," said Liu Lifeng, fund manager at BOC (SEHK 3988)

International Holdings. "Most institutions now expect the index to be soft

in the medium term."


Allowing swaps between shares on the two bourses would imply equalising

prices in the two centres, meaning a huge shift for firms such as Jiangxi

Copper (SEHK 0358), whose A-shares cost more than double its H-shares.


The imbalance between mainland and Hong Kong demand was evident earlier

this month when the mainland's top coal company Shenhua Energy sold shares

in Shanghai for the first time, attracting US$360 billion (HK$2.8 billion)

in subscriptions.


The Shanghai market is under heavy corrective pressure after repeatedly

notching up record highs. Fuelled by cash thrown off by China's galloping

economy, the index has risen 117 per cent this year, outpacing an 88 per

cent gain in H-shares.


"I'm sure at some point of time there will be the opportunity for

arbitrage between the two markets," said Rudolf Apenbrink, HSBC (SEHK 0005

, announcements, news) Investments (Hong Kong) Asia chief executive, which

has more than US$60 billion of assets under management.


"And at some point of time the price-valuation gap will diminish. But it

is nearly impossible for me to say how long that will take. It really

depends on regulations," he told Reuters.


The see-sawing came one day after a stockmarket spasm in the region's

other big emerging economy, India. Shares there plunged 9 per cent on Wednesday on fears that a method foreigners have used to invest in stocks

could be curbed, but they later recovered almost all the lost ground.


Chinese shares have soared not because of foreign money, which is largely

barred, but because Chinese savers have few investment options beyond

stocks, real estate and bank deposits.


Capital controls mean they may not invest abroad, while, at home,

financial markets are still underdeveloped and interest rate caps make

other investment products unattractive.


With no derivative instruments enabling investors to short sell, mainland

share prices have risen unimpeded by people betting against the herd.