Archive for August, 2007|Monthly archive page

Same stock but 200% of price difference on two stock markets

When a company here sell its stocks on multiple markets, the prices on different markets are typically very close.

Not for the Chinese stocks! The difference can be 200% and more!
Take Air China stock for example, its price is 15 CNY on Shanghai Stock Exchange and is 7 CNY on Hong Kong Stock Exchange for the exact same stock (see graphs below). That’s 200% premium!

A-Share = Chinese stock sold on Shanghai or Shenzhen stock markets

H-Share = Chinese stock sold in Hong Kong stock exchange (some also listed in US markets as ADR).

Because of currency exchange restriction, it is more difficult to arbitrage between the two markets. The gap started to grow substantially as the Chinese stock market roared in the past year.

Here are the premiums of A-Share over H-Share for stocks also listed in US ADR (based on Aug 20 prices):

Aluminum Corp. of China (ACH): 300%

China South Airline (ZNH): 260%

China Life (LFC):165%

The gap may start to close up now. Last week, the Chinese government announced that it would allow mainland Chinese citizens to invest in the Hong Kong stock market. The Chinese stocks on Hong Kong and US ADR markets have been on a roll. The China market ETF FXI (which holds most Chinese companies on Hong Kong market) was also lifted 16% the past week despite sub-prime loan crisis.