Here's why one stock is 5 times more expensive in Shanghai than it is in Hong Kong

hong kong

  • China brokerage CSC Financial trades at a five-times higher price in Shanghai compared to its shares on Hong Kong's exchange, Bloomberg first reported.
  • CSC traded at 6.73 Hong Kong dollars (87 cents) per share on the city's exchange on Wednesday, while it simultaneously traded at 30.58 Chinese yuan ($4.40) in Shanghai.
  • The phenomenon is known as the "A-to-H premium," a price gap unique to China and Hong Kong. The two exchanges were linked in November 2014, allowing Chinese stocks to trade on both but fall prey to different investor sentiments and trading behavior.
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China's second-biggest brokerage trades at a five-times higher level in Shanghai compared to its shares on Hong Kong's exchange, Bloomberg first reported Tuesday.

CSC Financial traded at 6.73 Hong Kong dollars (87 cents) per share on the city's exchange on Wednesday, while it simultaneously traded at 30.58 Chinese yuan ($4.40) in Shanghai. The massive price gap is driven by a phenomenon unique to China and Hong Kong called the "A-to-H premium."

Before 2014, the only way for international investors to buy shares of Chinese companies was through Hong Kong-listed H shares. The Hong Kong and Shanghai exchanges were linked in November 2014, allowing international traders to buy mainland-listed A stocks and giving Chinese investors access to H stocks.

CSC's A shares began trading in Shanghai after 7% of the firm's stock was offered publicly in 2018. A 61% float trades in Hong Kong as H shares. The gap in the two share class' prices can partially be attributed to the radically different float sizes, though other factors likely play a role.

International investors are barred from shorting A stocks, lifting a typical downward pressure equities face in other markets. Mainland investors are also betting CSC shares will rise as China boosts economic stimulus and the fractured brokerage sector consolidates, according to Bloomberg.

Institutional investors in Hong Kong expect the opposite. The firms depend on small brokerages for their business, and pay little mind to the industry's crowded environment, Bloomberg reported.

Regardless of the two parties' sentiments toward CSC, the firm faces new threats from its brokerage rivals. CSC recorded 3.8 billion yuan ($550 million) in net income over the first three quarters of 2019, while China's largest brokerage, Citic, brought in 10.5 billion yuan ($1.5 billion) over the same period. Citic also holds a 5% position in CSC, and previously said it would unload the stake by the end of December, according to Bloomberg.

Separate rival Huatai Securities is also less optimistic toward CSC stock. The firm labeled it "overvalued" in a March call and slapped the brokerage with a sell rating, Bloomberg reported.

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