Oct. 17 (Bloomberg) -- China is studying a plan to allow arbitrage in shares of companies traded on domestic and Hong Kong exchanges, the nation's securities regulator said.
``We will announce the result of the study soon,'' Tu Guangshao, vice chairman of the China Securities Regulatory Commission said in Beijing today. The plan was proposed by Hong Kong authorities, he said, without elaborating.
Almost half the stocks traded in both markets are more than twice as expensive on the mainland because of limits on inward and outward investment. The regulator is seeking to end price discrepancies amid concern that a bubble is building at home after China's benchmark index almost tripled this year.
``This piece of news will give a boost to the Hong Kong market and might take some steam out of'' shares in Shanghai and Shenzhen, said Peter Alexander, principal at Shanghai-based research firm Z-Ben Advisors Ltd.
The plan would affect Chinese companies with so-called H shares traded in Hong Kong and A shares listed on either of China's two exchanges. China's stocks added $2.5 trillion in market capitalization this year and the CSI 300 Index is the world's most expensive major benchmark.
Companies on the CSI 300 trade at an average 56 times reported earnings, compared with 18 times for the S&P 500 Index, according to data compiled by Bloomberg.
Price Gap
Tu's remarks came after the Hong Kong exchange closed. The benchmark Hang Seng Index gained 1.2 percent today and is up 47 percent this year.
Hong Kong-traded shares of dual-listed companies such as China Petroleum & Chemical Corp. may benefit, said Steven Leung, a Hong Kong-based director of institutional sales at UOB-Kay Hian Ltd. Sinopec, as China's largest refiner is called, closed at HK$12.32 ($1.59) today in Hong Kong and at 26.13 yuan ($3.47) in Shanghai.
Investors can't profit from the price gap because of restrictions on currency conversion and stock ownership. Yuan- denominated A shares are available only to Chinese individual and institutional investors, as well as selected foreign investors.
H shares are denominated in Hong Kong dollars and trade on an open market. Mainland Chinese individuals, however, are so far restricted from investing in the city.
Through-Train
Only qualified foreign and domestic institutions picked by China's regulators can trade equities in both markets. Overseas firms including UBS AG and Goldman Sachs Group Inc. have been allowed to buy China's local-currency A shares under the qualified foreign institutional investor, or QFII, program. Selected domestic institutions are permitted to buy shares abroad under a qualified domestic institutional investor program.
It's ``inevitable'' for China to allow its citizens to buy shares overseas, Tu said today, reiterating that the regulator is considering letting individual Chinese investors buy Hong Kong- traded stocks under a plan dubbed the ``through-train.''
``China's QDII and through-train programs will be the key arbitrage vehicles in the near future,'' said Jing Ulrich, chairman of China equities at JPMorgan & Chase Co. in Hong Kong. Any other arbitrage mechanism ``won't happen overnight.''
The Hang Seng has rallied 36 percent since China announced the plan to allow citizens to buy Hong Kong stocks on Aug. 20.
