January 11, 2018 / 10:36 AM / a year ago

GRAPHIC-China's H-share reform will benefit HK markets, but immediate upside limited

Jan 11 (Reuters) - Reforms by China that allow Hong Kong-listed mainland companies to trade locked-up equity on the open market could boost stock prices and liquidity in the territory, analysts say, but immediate upside is likely to be limited.

The move, announced by China’s security regulator late last month, helped push the Hang Seng Index past the 30,000-point mark to a decade-high on the first trading day of the year.

Reuters calculations showed that the total non-tradable market capitalisation of 152 Hong Kong-listed Chinese companies stood at about 2.6 trillion Hong Kong dollars, which amounts to only 8 percent of the total market capitalisation of Hong Kong-listed companies.

Under the pilot scheme, China will initially select up to three qualified companies. It has not yet named the companies.

Some of the Hong Kong-listed companies with large chunks of non-tradable shares are China Telecom, Zhongan Online P & C Insurance and CGN Power.

Despite optimism towards the reform, Morgan Stanley said its 2018 outlook for China’s offshore market remains unchanged, saying major shareholders tend to hold their stakes for the long term.

Drawing parallels with similar ownership reforms for China’s A-shares on the mainlaind launched in 2005, it said noted major share unlocking did not take place until 2008 to 2010.

It expects H-share unlocking to peak in 2020.

“In the long term, full circulation of H-shares is positive for China’s offshore equity market overall. It better aligns shareholders’ interest and attracts more high-quality Chinese domestic companies to list in Hong Kong,” the report said.

The announcement of the pilot scheme also lifted shares of investment banking firms and brokerages.

Thomson Reuters data showed the Hong Kong-listed brokerages are up about 6 percent this year, against the broader index gain of 4 percent, as of Thursday’s close.

Hong Kong Exchanges and Clearing Ltd is up about 12 percent this year.

Reporting By Patturaja Murugaboopathy; Additional Reporting by Gaurav Dogra; Editing by Dewey Sim and Sam Holmes

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