3 years ago

China - HK H shares - Red chips

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An obvious improvement on HKE’s liquidity level can be identified since November 2014 due to Shanghai Hong-Kong Share Market Connection Program that month.

H Shares also known as Hang Seng China Enterprises Index, refer to the shares of companies incorporated in mainland China that are traded on the Hong Kong Stock Exchange. Many companies float their shares simultaneously on the Hong Kong market and one of the two mainland Chinese stock exchanges.

Huge price discrepancies between the H shares and the A share counterparts of the same company are not uncommon. A share generally trades at a premium to H shares as the People’s Republic of China government restricts mainland Chinese people from investing abroad and foreigners from investing in the A-share markets in mainland China.

Red Chips  are the stocks of mainland China companies incorporated outside mainland China and listed in Hong Kong. These businesses are based in mainland China and controlled, either directly or indirectly, by the central, provincial or municipal governments of the Peoples’ Republic of China but listed in Hong Kong to allow overseas investment in the companies.

The term was coined by Hong Kong economist Alex Tang in 1992 and is a play on term blue chip stocks with the word “red” representing the Peoples’ Republic of China and the Chinese Communist Party.

After PBOC cut 25bps on cash rate on 24th November 2014, Shanghai Composite Index has been increasing from 2300 to 3800 (65% up) while H shares merely up about 3% before 27th March 2015. AH shares price premium has come to a significantly high level, and presents a very attractive arbitrage opportunity.


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