SINGAPORE, March 21 (Reuters) - Shares of Chinese companies
listed in Hong Kong are among the top performers in the world so
far this year, easily returning more than the S&P, as Chinese
investors pile into a market that was once the near-exclusive
playground of foreign fund managers.
Worried by signs that China is tightening monetary policy,
mainland investors are loading up on Hong Kong-listed Chinese
firms, which are trading at hefty discounts to the shares of the
same companies in Shanghai and Shenzhen.
Chinese are also pouring funds into Hong Kong as a hedge
against fears of further depreciation in the yuan currency
. Most Hong Kong listings are denominated in the local
dollar, which is pegged to the U.S. dollar.
The Hang Seng China Enterprises index, which tracks
H-shares, has surged almost 13 percent this year. The NASDAQ
is up just over 11 percent and the S&P 6 percent.
That rally has narrowed the premium commanded by
China's A-shares over H-shares to the lowest since December
2014, but investors say there is still money to be made.
Chinese investors remain wary of local shares after a crash
wiped trillions of dollars off its markets in mid-2015, said
Nicholas Yeo, head of China/Hong Kong equities at Aberdeen Asset
Management in Hong Kong.
"We've seen a reduction in participation by retail investors
in A-shares. They have been replaced by institutional investors,
who are looking to Hong Kong, where H-shares have been trading
at a discount for some time."
Tight capital controls have limited the ability of Chinese
to get funds out of the country, prompting them to pour their
savings into A-shares and driving those prices and valuations
significantly higher than H-shares.
But in the last few years, programs connecting the Shanghai
and Shenzhen stock markets to Hong Kong's have gained traction,
giving Chinese a route to invest overseas, with the proviso they
repatriate the funds to prevent actual capital outflows.
The juicy discounts seen in Hong Kong have been too good to
Using the stock market link-ups, Chinese investors pumped
$7.19 billion into Hong Kong stocks in January and February,
some 40 percent more than foreigners invested in mainland
The Shanghai Shenzhen CSI 300 index is up only 4.2
percent so far this year.
FOREIGNERS RETURNING TO GATEWAY TO CHINA
Adding to the boost for Hong Kong stocks, foreign funds,
which reduced exposure to Asia late last year as the U.S. dollar
strengthened, are now returning, drawn both by expectations of
global reflation and China's steadier economy.
That has whittled down the A-share premium over H-shares to
14 percent, compared with about 35 percent a year ago.
Chinese buyers have been largely focusing on H-shares of
China's banks for their relatively high dividend yields.
International investors, on the other hand, view Chinese
banks with scepticism, fearing their bad loans are much higher
than the lenders admit.
For instance, after a price gain of 15 percent in the last
three months, Industrial and Commercial Bank of China's H-shares
are now trading at 5.8 times forward earnings,
compared with 4.7 times a year ago.
For ICBC's A-shares, the closely watched metric
has seen only a slight change to 6.
"The shrinkage in the premium has been very narrow in focus.
Banks are the big movers behind that," said Tan Eng Teck, senior
portfolio manager at Nikko Asset Management in Singapore. "But
there's still a premium in other sectors."
Overall, the H-share index is trading at 8.3 times earnings,
up from 7.4 times at the start of the year.
Shanghai-listed A-shares are at 12.9 times, versus 13.2
times at the beginning of 2017, and Shenzhen-listed A-shares are
at 23.6 times compared with 24.5 earlier.
Given that H-shares remain cheaper than A-shares, investors
should still focus on the former, Tan said.
"Eventually, A-shares will come down to meet H-shares, so
you wouldn't want to buy A-shares," he said.
While H-shares still look more attractive, the recent surge
is leading international investors to contemplate the day when
the arbitrage opportunity closes altogether.
When that happens, some mainland shares will start to look
attractive, said Arthur Kwong, head of Asia Pacific equities at
BNP Paribas Investment Partners in Hong Kong.
"When it closes, we would be looking for unique stocks
listed only in China," Kwong said. "In Shenzhen, there are many
medium-sized companies not listed in Hong Kong, with very good
fundamentals. It will be more about stock hunting."
While most analysts believe Hong Kong's rally has room to
run, a reversal in bearish expectations for the yuan is a risk
factor, Tan warned.
If Chinese investors think the yuan has bottomed, "the
chances of them taking profits in Hong Kong and going back are
higher," he said.
($1 = 7.7651 Hong Kong dollars)
($1 = 6.9072 Chinese yuan renminbi)
(Reporting By Nichola Saminather; Additional reporting by
Saikat Chatterjee; Editing by Kim Coghill)