Watchlist – China’s A/H premium gap

On 9 July 2015 the Hang Seng China A H Premium Index reached a historic peak level of 149.57. This instrument measures the difference between the (i) ‘A’ (onshore) shares listed in Shanghai and Shenzen stock exchanges and (ii) the ‘H’ (offshore) shares issued by the same companies listed in Hong Kong.

HSCAHPsource: FT

The main reason why this is not a pure arbitrage opportunity can be explained by the different investor groups of the two exchanges. Although the regulatory bottlenecks between the two markets are expected to decrease gradually, nowadays the ‘A’ shares are primarily traded by locals, while the ‘H’ papers are in the focus of international investors. This premium pricing is significantly supported by the recently announced selling limitations in the onshore market.

If somebody believes that this artificial situation might turn to a more ‘normal’ trading environment, the most appropriate strategy might the the following

(i) short ASHR (Deutsche X-trackers Harvest CSI 300 China A-Shares ETF) and

(ii) long FXI (iShares China Large-Cap)

Probably these are the most freqently traded ETFs available for international investors in this matter.

Again, this is not a clear arbitrage strategy due to several factors, for example the above mentioned ETFs do not cover the same issuers and the premium values of the individual stocks are not equally distributed.