China's once-raging stock-market bulls are an endangered species.
The latest evidence: the near-extinction of the premium that mainland Chinese investors are prepared to pay for stocks listed both in Shanghai and Hong Kong.
On Thursday, the Hang Seng AH Premium Index fell below the 100 mark. The index tracks the difference between stock prices in Shanghai, called A shares, and prices of the same companies' Hong Kong listings, called H shares. A reading of 100 indicates that on average there is no price differential.
Since August 2006, A shares have traded at a premium to H shares without fail. In part this is because mainland investors have few asset classes to invest in beyond shares and property. Until recently, they couldn't short-sell, and they still cannot easily buy stocks outside of China.
Other factors are now outweighing these restrictions. For a start, mainland stock buyers have been digesting a massive increase in equity issuance. Companies have raised $64 billion in Shanghai this year, compared with $22 billion in Hong Kong, according to Dealogic.
Beyond this, in Shanghai's sentiment-driven market, short-term jitters about the direction of government policy have taken hold. Banking and property stocks have suffered particularly, as investors fear tighter controls on lending and property speculation, bringing down the average A-to-H-share premium. At the same time, foreign investors are reaffirming their belief in the "China story" -- particularly at current low valuations. Recently, cash has been flowing into China funds and a Bank of America Merrill Lynch survey, released this week, found fund managers are no longer "underweight" on China.
The current confluence of domestic pessimism and overseas optimism has, then, temporarily eliminated the A-to-H-share premium. If China were to loosen controls on foreign investors trading in Shanghai, and domestic investors trading abroad, any future differential could be arbitraged away. The introduction of stock index futures in Shanghai this year -- giving traders the opportunity to profit on market falls -- is also helping to cap Shanghai's tendency to bubble.
Long before those reforms have taken effect, though, it's likely that the premium will re-emerge. After all, traders in Shanghai are still prone to extravagant mood swings. The Shanghai bull could soon be sighted again.