Hong Kong stocks are cheapest against Chinese equities in a year amid Evergrande debt woes, regulatory storm

·3-min read

Hong Kong stocks were this month trading at their cheapest levels relative to China’s onshore shares in almost a year, as the unfolding debt crisis at China Evergrande Group and a regulatory crackdown weighed on risk appetite in Asia’s third-biggest market.

The 33 per cent discount that the Hong Kong shares of dual-listed companies had to their mainland China-traded stocks was the biggest since October 15 last year, according to a gauge of the price difference between the two markets compiled by Hang Seng Indexes Company.

“Lots of the industries Hong Kong-listed companies are engaged in still need time to digest the policy pressure,” said Wang Yitang, an analyst at Huaxi Securities. “It will take some time for Hong Kong stocks to seek a bottom and sentiment has yet to improve.”

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The divergence between the two markets has widened further this month after the exposure of China Evergrande’s debt woes, which has compounded the difficulties Hong Kong stocks face. The Hong Kong market has already been whipsawed by Beijing’s regulatory actions, which have ensnared industries ranging from ride-hailing and technology firms to after-school tutoring and casino companies.

Meanwhile, onshore markets in Shanghai and Shenzhen have largely withstood this turmoil because of the limited number of companies that are directly exposed to Beijing’s clampdown.

The Hang Seng Index is among the worst performers of the world’s major benchmarks this year, falling 11 per cent. The 60-member gauge is valued at 10 times earnings, the cheapest among major markets globally, according to Bloomberg data. The Shanghai Composite Index has, in contrast, risen 3.2 per cent.

The Hang Seng’s beaten down valuation was, however, not enough to alter analysts’ bearish call on Hong Kong stocks, with the fallout expected to persist. The overhang of the regulatory crackdown and the Evergrande episode has retrained trading activity in Hong Kong. The values of stocks that have changed hands on a daily basis significantly lag behind those traded on the mainland this year. Hong Kong’s market scored its highest daily turnover of HK$361 billion (US$46.4 billion) on July 27, while trading values have topped 1 trillion yuan (US$154.8 billion) for 47 consecutive days through Monday in China’s onshore markets.

Mainland investors, whose trades account for about a fifth of the turnover in Hong Kong’s market, have been cautious. They have offloaded a total of HK$2.1 billion of Hong Kong stocks through the cross-border Stock Connect exchange link over the past month.

Currently, the Hong Kong-traded shares of 136 dual-listed companies are all cheaper than their mainland China-listed stocks, with China Merchants Bank and Wuxi Apptec registering the smallest discounts, according to data provider Shanghai DZH.

For most of history, Hong Kong stocks have traded at a cheaper level than Chinese shares, with the discount reaching a record 52 per cent in 2008, according to the Hang Seng gauge tracking the price gap.

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