H-Share Convertibility Proposal Gets Mixed Reviews

As full convertibility of H-shares is back on the table now, market participants remain divided over what it will do the Hong Kong stock market.

China’s State Council is considering letting two Chinese mainland companies freely convert nonlisted domestic shares into H-shares traded on the Hong Kong stock exchange, sources told Caixin Wednesday. The move is seen as China further loosening its grip on the financial market and allowing more foreign participation.

Such policy will essentially increase the number of shares available for sale as H-shares in Hong Kong, as currently nonlisted domestic shares are added to the pool. Some analysts say more supply may keep a lid on H-share prices, although others say the opposite — that H-share prices could rise now that investors can gain greater control of mainland firms, even if they are only buying H-shares.

“It’s obvious it (H-share convertibility) will have a positive effect,” said Hong Hao, managing director and chief strategist at BOCOM International, the Hong Kong brokerage arm of Bank of Communications.

The full convertibility of H-shares will give investors the opportunity to obtain a so-called “control premium” — the amount a buyer is willing to pay above the market price to gain a controlling share in the company — and that will increase H-share valuations.

Most H-share companies have a large portion of nontradeable shares, which are held by founders and major shareholders. The percentage of nontradeable shares for mainland firms listed in Hong Kong often account for over half of a company’s total share capital.

Currently, converting unlisted domestic shares to H-shares requires approval from the general shareholders’ meeting before getting the go-ahead from the China Securities Regulatory Commission and Hong Kong’s exchange operator.

The proposed pilot program would increase the volume and velocity of H-share trades, a manager at a Chinese-invested fund in Hong Kong told Caixin. Share turnover rates for H-shares are between 40-50%, while mature stock markets have rates around 100%, he said, adding that share turnover for A-shares listed in the mainland can reach 200%.

But not all market watchers are positive about the benefits of floating unlisted shares.

Many H-share holders are sitting on a massive portion of a company’s shares. If convertibility is allowed, there will be too much supply, which will result in large market adjustments, said Tan Shaoxing, chairman of the Hong Kong Institute of Investors, a nonprofit investor protection group.

The enormous amount of money involved in nontradeable shares means it might be difficult for these shareholders to reduce their holdings in the secondary market, said Zhang Xionglue, a researcher at Hong Kong Feng Sheng Asset Management.

“I can see a situation where these major shareholders will reduce holdings through block trades — privately negotiated transactions — rather than selling to retail investors on the exchange,” Zhang said.

Contact reporter Liu Xiao (liuxiao@caixin.com)