Brendan: There has been a lot of talk lately about the concept of “A/H premium” can you describe what this is and whether it presents an arbitrage opportunity for U.S. investors?
Steve: The “A/H premium” refers to the price disparity of stocks that are dually listed on both the Hong Kong and onshore stock exachanges. In many cases Hong Kong (H-shares) have lagged their onshore equivalents (A-shares).
The Hong Kong market and the U.S. market are similar in that their primary investor-base consists of institutional investors. In contrast, the onshore equity market’s investor-base is primarily mainland Chinese investors. The Hong Kong market represents a global investor’s view of China while the onshore equity market represents a mainland Chinese investor’s view of China. In the long run the two markets should be directionally correlated. In the near term while the A/H premium exists, I don’t believe pure arbitrage is feasible because short selling is very difficult due to limited quotas and high fees.
Brendan: We know the International Monetary Fund (IMF) is reviewing China’s currency the renminbi (RMB) for reserve currency status. How important is this for China?
Steve: The government is focused on the internationalization of the RMB. We believe the current global economic structure is really G2, with the U.S. in the west and China in the east. China is very important to the global economy and the government wants its currency to reflect this importance through broadening the RMB’s use in international transactions. National pride is also a factor. In the same vein, the government is very focused on the One Belt One Road policy. They want to continue trade with the U.S. but also expand trade with Europe, the Middle East and Africa.
Brendan: Can you explain the One Belt One Road policy for those unfamiliar with it?
Steve: The government wants to maintain China’s GDP near current levels. In order to achieve this goal China must increase its number of trading partners. One Belt One Road refers to the government’s new international infrastructure policy that will facilitate trade between China by land and by sea. One Belt refers to the maritime routes and ports needed to support increased trade by sea. One Road refers to ground infrastructure running along the old Silk Road trading route connecting China with the Middle East and Europe by land.
Brendan: You joined us here in New York City following a stop in Omaha for the Berkshire Hathaway 50th anniversary shareholder meeting. I understand Warren Buffet made some bullish comments on investing in China ¬ can you tell us what he said?
Steve: In regard to investing in China, Mr. Buffett said it is impressive what China has been able to achieve in such a short amount of time. He added that investors should have faith in China because it is the second largest economy in the world and will be the largest at some point in the future. Warren Buffett is a legend in China so it was great to hear him talk favorably about the Chinese markets.
Brendan: Many thanks for sharing your views with our readers Steve.
If any of our readers have further questions please feel to contact KraneShares and we can arrange a conference call with Steve.
- Source: China Merchant’s Bank retrieved 5/11/2015
- Source: Bosera Asset Management as of 12/31/2014
- Based off the The MSCI China A International Investable Market Index (IMI) which captures large, mid and small-cap representation and includes the China A-share constituents of the MSCI China All Shares IMI Index. It is based on the concept of the integrated MSCI China equity universe with China A-shares included. From the start of the A-share market rally on May 16, 2014 through 4/30/2015.