January 2, 2018 / 8:16 AM / 8 months ago

Hong Kong shares power to decade high on H-share reform

SHANGHAI, Jan 2 (Reuters) - Hong Kong-listed Chinese firms propelled the Hang Seng Index past the 30,000-point mark to a decade-high on the first trading day of the year, boosted by optimism H-share convertibility reform will fuel more momentum after a bumper 2017.

The Hang Seng China Enterprise Index, which tracks Hong Kong-listed Chinese companies, surged 3 percent after China unveiled on Friday a pilot scheme that would allow mainland-incorporated companies listed in Hong Kong to convert their non-tradable equity into free-floating H-shares.

Although the scheme would potentially increase share supply, investors largely interpreted the reform as positive as it would improve corporate governance and boost foreign interest in Hong Kong-listed Chinese companies.

Some even drew parallels to China’s A-share ownership reform in 2005-2007, which was a prelude to the biggest bull market in China’s modern history.

Currently, shares held by founders or major shareholders of Hong Kong-listed mainland firms are not eligible for trading on exchanges, “which is why major shareholders don’t really care about valuation of their H-shares,” said Zhou Liang, fund manager at Minority Asset Management Co, which invests in both China and Hong Kong stocks.

“But if their shares become tradable, they will pay attention to market valuations and have an incentive to improve operation efficiency.”

Beijing Gaohua Securities Co, the Chinese partner of Goldman Sachs, estimates there are 2.6 trillion yuan ($400.3 billion) worth of non-tradable shares in 249 H-share companies, equivalent to 8 percent of Hong Kong’s stock market.

The brokerage hailed the H-share convertibility scheme as “a milestone in China’s capital market reform,” comparing it with A-share ownership reform, which boosted market capitalisation of A-share companies after converting non-tradable state-owned shares into free-floating stocks during the 2005-07 period.

China will initially select up to three companies in the H-share convertibility pilot scheme.

Albert Xu, a Hong Kong-based analyst at brokerage Zhongtai International, said the reform would eventually lure more Chinese companies to list in Hong Kong, while also making H-shares more attractive to foreign investors.

“If there’s more availability of shares to foreigners, who can exercise more control through increasing ownership, that would benefit share prices.”

He pointed out that Chinese brokerages with operations in Hong Kong would benefit from the scheme, which would boost trading volume in H-shares, and generate more underwriting fees through an expected increase in Hong Kong listings.

On Tuesday, shares of Hong Kong-listed Chinese brokerages, including China Merchants Securities, Shenwan Hongyuan Securities and Haitong Securities posted solid gains.

China Unicom, reported to be among the first companies to join the pilot scheme, jumped more than 3 percent.

$1 = 6.4947 Chinese yuan Reporting by Samuel Shen and Brenda Goh; Editing by Jacqueline Wong

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