SHANGHAI-HONG KONG STOCK CONNECT PROGRAM IS SET TO START NEXT MONDAY -- ITS APRIL ANNOUNCEMENT IS THE MAIN REASON SHANGHAI STOCKS HAVE BEEN GAINING ON HONG KONG -- SHANGHAI STOCK INDEX TOUCHES THREE-YEAR HIGH AND IS STARTING TO GAIN ON REST OF THE WORLD
FOREIGNERS WILL BE ABLE TO BUY SHANGHAI STOCKS ... Starting next Monday, foreign investors will be able for the first time to buy and sell stocks listed on the Shanghai Stock Exchange via the Hong Kong Stock Exchange. More than 500 mainland stocks (previously unavailable to foreign investors) will be traded on the Hong Kong Stock Exchange (accounting for 90% of the Shanghai market capitalization). At the same time, stocks traded in Hong Kong (but not Shanghai) will be available to Chinese citizens. While that may serve to boost interest in Hong Kong stocks, it appears that the biggest beneficiary are mainland stocks traded in Shanghai. And that probably accounts for the much stronger performance of Shanghai stocks since the program was first announced this April. The black line in Chart 1 shows that the Hong Kong Hang Seng Index has done much better than the Shanghai Stock Exchange Index (red line) over the last five years. The dotted line, which plots a relative strength ratio of Shanghai versus Hong Kong stocks, has been falling since the spring of 2009. During those five years, Hong Kong stocks have gained 85% versus a much smaller gain of 18% in Shanghai. That started changing this April when the Shanghai-Hong Kong link was announced. Since the end of April, Shanghai stocks have risen three times faster than those in Hong Kong (21% versus 7%). Both stock exchanges jumped on this Monday's announcement of next week's starting date (with Shanghai once again showing a slight edge).
(click to view a live version of this chart)
Chart 1
SHANGHAI INDEX NEARS UPSIDE BREAKOUT... The weekly bars in Chart 2 show the Shanghai Stock Index ($SSEC) closing yesterday just above its January 2013 intra-day high at 2443. (It's trading 1% higher today as well). If that upside breakout holds through the end of the week, that would put the SSEC at the highest level in nearly three years. Given the fact that Shanghai market has lagged so far behind Hong Kong (and the rest of the world), it seems reasonable to expect that new global funds will flow into mainland stocks and help them play catch up to the rest of the world.
(click to view a live version of this chart)
Chart 2
CHINESE STOCKS STARTING TO GAIN ON REST OF THE WORLD... Chart 3 shows how badly mainland Chinese stocks have done over the last five years. The falling red line plots a relative strength "ratio" of the Shanghai Stock Index divided by the Dow Jones World Stock Index. Since the spring of 2009, the SSEC has gained 18% versus a gain of 128% for the rest of the world. Hong Kong stocks gained a more respectable 85% during those five years, but still lagged behind the rest of the world. The circle to the bottom right on Chart 3 shows the Shanghai/World ratio breaking a falling resistance line going back to 2009. Chart 3 suggests at least two things. First, that under-owned Shanghai stocks represent one the best bargains in the world. And secondly, that their performance is starting to improve. No doubt, it's recent improvement is in anticipation of foreign buying starting next week. [Since April when the Shanghai-Hong Kong Stock Connect Program was first announced, both Chinese stock markets have started to gain on the rest of the world].
