Friday, June 29, 2007

A Very Important Index Is Launched - Hang Seng China AH Premium Index

HSI Services Limited announced today the introduction of a series of Hang Seng China AH Indexes to help investors track the performance of those Chinese companies dual listed in China and Hong Kong.

The most significant one is the Hang Seng China AH Premium Index (“AH Premium Index”), an index measuring the weighted average premium (or discount)of A-share prices to H-share prices of the constituents. The index is designed in a way that the higher the index, the larger the premium of A shares over H shares, and vice versa. When A-share prices are at par with H-share prices on average, the index will be at 100.

Initially the index will have 27 large AH companies that have completed share reform as constituents.

As at 27 June 2007, the AH Premium Index closed at 146.73, meaning A shares are trading at an average premium of 46.73% above H shares.

The trend from Jan 06 to Jun 07 is shown in the following chart.

How to play this index?

No tradable derivative product is announced yet.

However, if you believe the A-H price gap will converge like I do and cannot wait, one possible way to play is to long a number of the 27 constituents. Regardless of the structure of derivative product, issuer has to hedge its position by long H and short A (if the index is trending down, ie, tightening of the A-H gap).

Instead of looking at the full list of 45 A-H dual listed stocks, we shall better focus on this shortened list of 27. I've updated the full list HERE with level of H-share discount sorted in order.

The index will be available and disseminated starting 9 July 2007.

1 Comment:

Anonymous said...

Thanks for the putting the chart up. Very interesting!

Everyone is saying that the yuan is undervalued. The existence of a share premium seems to say the currency could be overvalued. ie. if there were no currency controls a lot of money would flow out of china to stock markets overseas and force the yuan down.