Do I understand correctly that it is possible to convert A shares into H shares, but not the other way around? Any change to that rule should be very material to stock prices. Do you see that happening?
"A Shares and H Shares are generally neither interchangeable nor fungible, however, the A Shares may be converted into the H Shares."
I doubt that one can convert A-shares into H-shares. The rationale is that China imposes restrictions on capital outflows, so converting A shares, which are traded in RMB, into H shares, which are traded in Hong Kong dollars, could potentially create a loophole for circumventing these controls. I don't believe such a mechanism exists. Through my Chinese broker, I have the option to purchase either H or A shares. However, I must make this decision beforehand and, to the best of my knowledge, cannot swap them afterward. Investors outside of China can engage in similar transactions for certain stocks via programs like the Qualified Foreign Institutional Investor (QFII) scheme and the Stock Connect program, which links Hong Kong with mainland China.
TRANSFER OF THE DOMESTIC SHARES FOR LISTING AND TRADING ON THE
HONG KONG STOCK EXCHANGE
According to the stipulations by the State Council securities regulatory authority and the Articles of Association, the holders of the Domestic Shares (A Shares) may transfer the Domestic Shares held by them to overseas investors, and such transferred shares may be listed or traded on an overseas stock exchange provided that the transfer and trading of such transferred shares shall have obtained the approval by the State Council securities regulatory authorities, including the CSRC. In addition, such transfer shall have completed any requisite internal approval process and complied with the regulations prescribed by the State Council securities regulatory authorities and the regulations, requirements and procedures prescribed by the relevant stock exchange. No approval by separate class meeting is required for the listing and trading of such transferred shares on an overseas stock exchange.
In this regard, if any holder of our Domestic Shares is to transfer its Domestic Shares to overseas investors and for listing and trading on the Hong Kong Stock Exchange, such transfer and conversion will need to obtain the approval of the relevant PRC regulatory authorities, including the CSRC.
"According to the theory of efficient markets, such disparities should be quickly eliminated through arbitrage"
I don't think that is what the Efficient Market Theory (EMT) says, I think that is an assumption about what it means. The EMT simply says that you cannot beat the market by using public information. So whilst the disparity between A and H shares seems irrational, an investor who went long H and short A would not have gained any excess return. The EMT does not say that market prices are "correct", just that public information cannot help you to correctly predict where prices will go in future.
It really depends on the occasion, but things can change very quickly. In October 2022, China seemed doomed after Xi's third election, destined to be in lockdown forever. However, just two months later, following the reopening, everything turned around and share prices converged.
Do I understand correctly that it is possible to convert A shares into H shares, but not the other way around? Any change to that rule should be very material to stock prices. Do you see that happening?
"A Shares and H Shares are generally neither interchangeable nor fungible, however, the A Shares may be converted into the H Shares."
I doubt that one can convert A-shares into H-shares. The rationale is that China imposes restrictions on capital outflows, so converting A shares, which are traded in RMB, into H shares, which are traded in Hong Kong dollars, could potentially create a loophole for circumventing these controls. I don't believe such a mechanism exists. Through my Chinese broker, I have the option to purchase either H or A shares. However, I must make this decision beforehand and, to the best of my knowledge, cannot swap them afterward. Investors outside of China can engage in similar transactions for certain stocks via programs like the Qualified Foreign Institutional Investor (QFII) scheme and the Stock Connect program, which links Hong Kong with mainland China.
Aha, I see. I guess the only exception is a conversion to H-shares for the sale of those shares to foreign investors, in case of an IPO for instance.
I got this from a quick google search;
https://www1.hkexnews.hk/listedco/listconews/sehk/2008/0229/01186_295219/e122.pdf
TRANSFER OF THE DOMESTIC SHARES FOR LISTING AND TRADING ON THE
HONG KONG STOCK EXCHANGE
According to the stipulations by the State Council securities regulatory authority and the Articles of Association, the holders of the Domestic Shares (A Shares) may transfer the Domestic Shares held by them to overseas investors, and such transferred shares may be listed or traded on an overseas stock exchange provided that the transfer and trading of such transferred shares shall have obtained the approval by the State Council securities regulatory authorities, including the CSRC. In addition, such transfer shall have completed any requisite internal approval process and complied with the regulations prescribed by the State Council securities regulatory authorities and the regulations, requirements and procedures prescribed by the relevant stock exchange. No approval by separate class meeting is required for the listing and trading of such transferred shares on an overseas stock exchange.
In this regard, if any holder of our Domestic Shares is to transfer its Domestic Shares to overseas investors and for listing and trading on the Hong Kong Stock Exchange, such transfer and conversion will need to obtain the approval of the relevant PRC regulatory authorities, including the CSRC.
"According to the theory of efficient markets, such disparities should be quickly eliminated through arbitrage"
I don't think that is what the Efficient Market Theory (EMT) says, I think that is an assumption about what it means. The EMT simply says that you cannot beat the market by using public information. So whilst the disparity between A and H shares seems irrational, an investor who went long H and short A would not have gained any excess return. The EMT does not say that market prices are "correct", just that public information cannot help you to correctly predict where prices will go in future.
It really depends on the occasion, but things can change very quickly. In October 2022, China seemed doomed after Xi's third election, destined to be in lockdown forever. However, just two months later, following the reopening, everything turned around and share prices converged.