China’s A-H share gap widens over growth optimism

Bloomberg

Mainland Chinese stocks are outperforming their offshore-listed peers as domestic investors bet the country’s economy will withstand the trade war with the US.
The Shanghai Composite Index has rallied more than 21 percent this year, compared with a 4.3 percent advance by the Hang Seng China Enterprises Index in Hong Kong. The Shanghai measure is trading near its highest level relative to the H-share gauge since late 2017.
The bullish sentiment onshore comes amid expectations of state support ahead of the 70th anniversary of the People’s Republic of China on October 1 — even as foreign traders grow pessimistic in the face of a slowing global economy and a sliding yuan. After markets closed on Friday, the central bank lowered the amount of cash banks must hold as reserves to the lowest level since 2007.
“The divergence shows that domestic investors have more faith in China’s ability to guide its economy through the trade war,” said Gu Yongtao, a Beijing-based strategist with Cinda Securities Co.
The Hong Kong market is more sensitive to flows of foreign funds, which will pull out of emerging markets amid global uncertainty, Gu said. Such sensitivities haven’t deterred bullish onshore investors from snapping up shares in Hong Kong’s stock market for 37 straight days as of Monday, the longest stretch since late 2017.
The latest easing may help sustain gains. The required reserve ratio for all banks will be lowered by 0.5 percentage points, taking effect on September 16, the People’s Bank of China said. The PBOC also cut the reserve ratios by one additional percentage point for some city commercial banks, to take effect in two steps on October 15 and November 15.
The Shanghai Composite closed up 0.8 percent on Monday while the Hang Seng China gauge slipped 0.1 percent.
“China has a strong central government, which has more policy room and influence over its markets and the economy than its peers, so local investors can count on that,” said Dai Ming, a fund manager with Hengsheng Asset Management Co. Expectations that authorities will act to keep the mainland stock market stable before China’s national day celebrations will also boost onshore equities, he said.
The divergence between mainland stocks and their Hong Kong-listed peers will continue as long as the trade war drags on, according to Ronald Wan, chief executive of Partners Capital International Ltd.