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The best way to invest in China right now

1-6By Kim Iskyan, Truewealth Publishing From Business Insider

Buying an asset at a 25 percent discount is a great deal. It’s means that much easier to make money on an investment. And this is the case with some of China’s biggest and best companies right now.

Chinese companies listed on mainland exchanges, like Shanghai or Shenzhen, are called A-shares. These are denominated in Chinese yuan, and are what local Chinese investors buy and sell.

But the Chinese government allows some of these companies to also list shares on the Hong Kong exchange. They fall under the jurisdiction of Chinese law, but trade in Hong Kong dollars – just like any other stock on the Hong Kong exchange.

They’re called H-shares. They’re available to foreign investors… and they’re one of the best ways to invest in China.

It’s not uncommon for a large Chinese company to have both an A-share listing (shares that only trade on mainland exchanges) as well as an H-share listing.

2-4But H-shares often trade at a discount to A-shares. How much of a discount?
The graph below shows the Hang Seng China AH Premium Index, which reflects the historical A-share/H-share premium/discount for the 63 largest dual-listed Chinese stocks (which are shares that trade on a mainland exchange as well as the Hong Kong Exchange).

It shows that A-shares, after a period of trading at a slight discount to H-shares in 2014, have widened their premiums to the point where dual-listed stocks trade about 25 percent higher on the mainland than in Hong Kong.

No one has a perfect explanation for why this happens.

It might have to do with a different investor base for A and H-shares. Individual and retail mainland investors dominate A-shares trading. Broadly speaking, these investors are more prone to bouts of over-exuberance, followed by rampant selling. But Hong Kong is home to more institutional investors, who tend to emphasise fundamentals and valuations.

Also, technical factors, such as the difficulties involved in cross-border trading between mainland and Hong Kong exchanges, play a role. It’s difficult for foreign investors to short stocks on mainland exchanges. China restricts cross-border money flows – both of which make arbitrage more difficult. If arbitrage – that is, profiting from pricing discrepancies – were easier, the discount would narrow.

That Hong Kong’s currency is pegged to the U.S. dollar, not the Chinese yuan, also plays a role. And regulatory differences between the Hong Kong and Chinese markets may also be a factor.

Whatever the reason, this discount is one of the great anomalies of the investing world. Shares of the same company often trade at lower valuations in Hong Kong than they do in Shanghai or Shenzhen.

And it’s something that investors can take advantage of. That discount won’t exist forever.

In coming days we’ll be talking a lot more about how to do this.

Read the original article on Truewealth Publishing Copyright 2016. Follow Truewealth Publishing on Twitter.

1 6 Truewealth Publishing The H-share discount
2 4 Truewealth Publishing

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