Chinese stocks still overvalued

For all the losses in Chinese stocks since the nation’s record bull market ended in June, shares on mainland exchanges are still more than twice as expensive as their identical counterparts in Hong Kong.

Dual-listed companies traded at an average 115% premium in China at the end of last month, within three percentage points of a four-year high in July, according to monthly data compiled by Bloomberg. The price differences have persisted even after a $4.9-trillion sell-off dragged the Shanghai Composite down 39% from this year’s high.

Viewed for months as a sign of overvaluation in mainland shares before they peaked in June, the gaps have failed to shrink as government-backed funds intervened to prop up the local market. CMB International Securities, the KGI Securities Company and the Fortune SG Fund Management Company say it’s only a matter of time before valuations on yuan-denominated A shares come back down to earth.

“A shares are still overvalued,” said Daniel So, a strategist at CMB in Hong Kong. “Downside risks are larger than upside potential.”

The divergence widened again on Tuesday, according to the Hang Seng China AH premium index. That gauge shows the mainland market valued at a 41% premium. The Shanghai Composite dropped as much as 4.7% on Wednesday before paring its losses to 0.2% at the close.

Authorities renewed their intervention in equities last week to halt the biggest sell-off since 1996, according to people familiar with the matter.

The securities regulator also asked brokerages to step up their support for share prices by contributing 100-billion yuan ($15.7-billion) to the nation’s market rescue fund.

The effort to support markets was part of a broader push to ensure nothing detracted from Thursday’s World War II victory parade.

“Most dual-listed shares are highly overvalued in Shanghai due to government intervention,” said Ken Chen, a Shanghai-based analyst at KGI Securities.

Price gaps were unlikely to narrow any time soon because the government was still intent on supporting the mainland market, said William Wong, the head of institutional sales trading at Shenwan Hongyuan Securities in Hong Kong. He said restrictions on short sales in the mainland could be driving investors to bet against Hong Kong equities instead, putting additional pressure on so-called H shares in the former British colony.

The intervention has been driving away foreign investors. They cut holdings of mainland shares through the Shanghai-Hong Kong exchange link over the past two months, pulling out about $4.8-billion since the end of June.

“I expect the AH premiums to narrow in the long term” as mainland valuations dropped, said Alexandre Werno, an executive vice-general manager of Fortune SG, which oversees about $11-billion. – Bloomberg

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