UPDATE 1-China's cross-market trading could make A-Shares ETFs a good buy -analysts

Fri Apr 11, 2014 1:51pm EDT

(Adds comments from analyst and details on Hang Seng index)

By Ashley Lau

NEW YORK, April 11 (Reuters) - U.S. investors could benefit from China's decision to allow cross-market investing between Shanghai and Hong Kong by buying exchange-traded funds that have access to China's mainland A-shares market, Credit Suisse analysts said in a note on Friday.

The ability of investors to buy stocks from either exchange more freely may narrow the valuation gap between so-called A-shares, traded in Shanghai, and so-called H-shares, traded in Hong Kong, the analysts wrote, thus allowing investors to profit from the spread tightening.

"The gap is already starting to close," said senior ETF.com analyst Dennis Hudachek, pointing to China's Hang Seng China AH Premium Index, which measures the premium, or discount, of A-shares to H-shares. The index was last at 96.58, up from 95.37 at the previous day's close and edging closer to 100, which would mean the shares are trading at no premium or discount.

"It's expected that the premium between A-Shares and H-Shares is probably going to disappear," Hudachek said, noting that if there's any kind of a price differential between the shares, traders will be able to immediately jump in and arbitrage that difference.

A-shares, which have historically traded at a large premium to H-shares, have recently traded at over a 5 percent discount to H-shares, the Credit Suisse analysts say. The move by Chinese regulators to allow freer cross-border trading "could be the catalyst that brings the share classes back in line - as evidenced by the spread tightening by 1.7 percent after the announcement."

Thus, investors may profit from getting long exposure to A-shares.

ETFs such as Deutsche Asset and Wealth Management's db X-trackers Harvest CSI 300 China A-Shares Fund, Van Eck Global's Market Vectors ChinaAMC A-Share ETF, and KraneShares' Bosera MSCI China A Share ETF all allow direct access to China's mainland A-shares market.

Investors can expect more A-shares ETFs in the future from those three providers, according to company filings with the U.S. Securities and Exchange Commission that show the ETF issuers have plans to launch more such funds. China A-shares ETFs on the horizon include some focusing on more specific sectors such as consumer staples and consumer discretionary products, as well as small-cap stocks, which analysts expect to do well in the long term. (Reporting by Ashley Lau in New York; Editing by Jonathan Oatis and Grant McCool)

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