Oct. 18 (Bloomberg) -- China's benchmark stock index fell the most in five weeks on speculation the securities regulator will adopt a plan that may narrow the price gap between shares traded simultaneously in Shanghai and Hong Kong.
China Securities Regulatory Commission Vice Chairman Tu Guangshao said yesterday that China is studying a plan to allow arbitrage between the two markets. Tu ``misspoke,'' Liu Fuhua, a spokesman for the regulator, said today after markets closed, declining to confirm whether such a plan is being considered.
Limits on inward and outward investment helped China's CSI 300 Index almost triple this year, outpacing a 91 percent gain in Hong Kong's Hang Seng China Enterprises Index, which measures 43 so-called H shares of Chinese companies.
Tu's comments ``had a negative impact on the local market and stocks with higher premium over their Hong Kong shares were dumped,'' said Wang Zheng, who manages the equivalent of $500 million at the asset management unit of Everbright Securities Co. in Shanghai.
Bank of Communications Co. and Aluminum Corp. of China Ltd.'s A shares paced the declines in China, with the CSI 300 Index sliding the most since Sept. 11. The two companies' H shares rose in Hong Kong, where the Hang Seng Index breached 30,000 for the first time.
The CSI 300, which tracks yuan-denominated A shares listed on China's two exchanges, slid 3.6 percent to 5,615.75 at the 3 p.m. close in Shanghai. The Hang Seng gained 0.6 percent to 29,465.05. It earlier touched 30,025.07. The H-share index added 1 percent to 19,722.38, after climbing as much as 5 percent.
Narrowing The Gap
The CSI 300 has jumped 175 percent this year, the most among 90 key stock indexes tracked by Bloomberg, valuing it at an average 54 times reported earnings. That's more than the 31 times for the Hang Seng China, which has gained 91 percent in 2007.
Tu's comments in Beijing raised expectations there will be measures installed to help narrow that gap. The regulator will announce the result of its study ``soon,'' Tu said.
C.K. Chan, a spokesman for the city's Securities and Futures Commission, declined to comment on such a plan today, as did Wong Hing-fung, a spokesman for the Hong Kong Monetary Authority, the city's de facto central bank.
Bank of Communications, China's fourth-largest lender by market value, fell 3.6 percent to 14.82 yuan in Shanghai. It climbed 7.1 percent to HK$11.72 in Hong Kong. Aluminum Corp.'s Shanghai shares slumped 6.2 percent to 50.72 yuan. The Hong Kong stock gained 2.9 percent to HK$24.80. The company, known as Chalco, is China's biggest aluminum producer.
Free Float
``It is reasonable to expect a much bigger impact on the A shares prices than a positive impact on H share prices,'' Vincent Chan, an analyst at Credit Suisse Group analyst wrote in a report today.
The percentage of free-float listed A shares is much smaller than for H shares, he wrote. If the two types of shares became fungible, large amounts of H shares would be swapped into A shares.
Chinese companies list in Hong Kong to lure international investors prohibited from buying shares on mainland exchanges. The market value of so-called H shares and red chips accounted for 53 percent of the total for the Hong Kong stock exchange's main board at the end of September, up from 26 percent at the end of 2002, according to the bourse's Web site. In 1997, when the U.K. handed Hong Kong back to China, they accounted for 16 percent.
China Eastern Airlines Corp., the country's third-largest carrier, slid 8.4 percent to 16.35 yuan in Shanghai. It added 2 percent to HK$8.01 in Hong Kong. Jiangxi Copper Co.'s A shares slid 6 percent to 65.95 yuan. The company, China's second-biggest copper producer, rose 4.1 percent to HK$30.75 in Hong Kong.
Years To Develop
Allowing arbitrage is ``clearly positive for H shares and Hong Kong in general,'' said Howard Wang, who oversees $30 billion as JF Asset Management Ltd.'s head of Greater China. Wang isn't changing his holdings just yet because the plan may take years to develop, the Hong Kong-based fund manager said.
Optimism for the plan to proceed may recede ``as people understand the further implications of this,'' Wang said.
The Shanghai Composite Index, which tracks the bigger of China's stock exchanges, fell 3.5 percent to 5,825.28. The Shenzhen Composite Index dropped 2.5 percent to 1,494.59.
Tu's comments come on top of speculation mainland individuals will be allowed to invest directly in Hong Kong's equities. That expectation has helped fuel a two-month rally in the Hang Seng Index, driving the benchmark up 45 percent.
`Bite The Bullet'
``People don't know what to believe anymore but also don't want to miss out,'' said Brooke Babington, a trader at Helmsman Global Trading Ltd. in Hong Kong. ``They've got to bite the bullet.''
Analyst ``buy'' ratings on Hong Kong stocks jumped to 65 percent of recommendations last month, the highest percentage since January 2001, according to data compiled by Bloomberg. The last time they were as bullish was 2001 as the Internet bubble burst, and October 1997, when Asian currencies plummeted.
PetroChina Co., China's largest oil producer, gained 1.2 percent to HK$18.92. A 72 percent gain in its shares this year helped PetroChina to this week overtake General Electric Co. as the world's second-largest company by market value. Chairman Jiang Jiemin said on Oct. 15 that the company may debut in Shanghai next month.
Among Hong Kong-traded companies without a mainland listing, Cnooc Ltd., China's largest offshore oil producer, added 0.7 percent to HK$14.38.
