The China government realizes the current stock market is too hot and tries to cool it down. In a state controlled economy, there is more the government can do, such as raise tax, set new tax, raise interest rate... And they can even make the measure effective right the way. On the other hand, they don’t want to see a crash. It’s obvious that the China government realizes the more options they have, the easier they can crash the market. That’s why they always introduce changes in a very slow pace. That makes every correction due to new policy the best buying opportunity.
The same company can have her A-Shares traded on Shanghai and Shenzhen stock exchanges and her H-Shares traded on Hong Kong exchange. For example, the China Life Insurance Co. Ltd. trades as A-Share on Shanghai exchange (SHA:601628), H-Share in Hong Kong exchange (HKG:2628) and as ADR on New York Exchange (NYSE:LFC).
Other than domestic investors, only authorized institutional investors can invest in A-Shares (QFII) and the total amount is limited.
The H-shares traded in Hong Kong allow international investors (except for China citizens) to invest.
The isolated A-share market is the reason of A-Shares are trading at premium to their H-Shares. H-Shares are discounted by 30~40% in average.
The new policy allows China banks and funds invest in securities trade on Hong Kong exchange through QDII. The move not only redirects some of the over supplied money to the Hong Kong stock market, it also releases some of the pressure of the appreciation of Yuan.
The sudden increase in the demand of H-Shares makes it a very attractive investment.
Money Flood from the North
The China government offers QDII so that China investors can invest in foreign capital. That redirects some of the hot money in China to other markets.
China takes another step by trying out a new program that allows individual domestic investor to invest in the Hong Kong stock market directly. The trial program is limit to the Binhai newly developed area of Tianjin only.
The QDII and the new policy increases the demand of foreign currency that reduces some pressure of the appreciation of Yuan.
In Hong Kong, they call it the Money Flood from the North.
The Hong Kong stock market benefits the most since China investors would like to invest in something they are familiar. The discount in H-share is also very attractive.
After the H-share, the next target is probably the local blue-clip stocks of Hong Kong.
The US wants the Yuan to appreciate to balance the trade deficit.
China never say no on the Yuan appreciate but as mentioned above, they’d like to do it in a slow pace.
The value of the Chinese capital you buy today will increase along with the appreciation of the Yuan.
2008 Olympics
Many believe that the Chinese government will tolerate the red hot market on/before the 2008 Olympics in Beijing. Many believe that the Chinese government won’t take the risk to ruin the opportunity to show the world the new China.
