PTR Shares Surge on Potential Shanghai Listing

PetroChina ADR shares have been very, very good to me. The shares haven't been tradeable for ordinary Chinese as the central government owns around 90% and the rest trades in New York and Hong Kong. Now that they're planning to list in Shanghai, there's speculation that rabid Chinese investors will drive the price way up: Article

"Hong Kong's H-share index, a benchmark of 41 companies that are incorporated in China and whose businesses are focused there, currently trades at about 19.2 times projected 2007 earnings. Comparable shares listed in Shanghai trade at 45 times forward earnings."

Are they overpaying, or are we underpaying? Probably some of both.
-Rodg

Arbitraging Chinese stocks
Wednesday June 20, 2:45 pm ET

The world's biggest arbitrage opportunity lies tantalisingly out of reach. Courtesy of the frenzy in Shanghai's stock exchange, the shares of companies with dual Hong Kong and mainland listings trade at totally different prices. Among the top 10 dual-listed stocks by market capitalisation, domestic shares trade at an average 43 per cent premium. The arbitrage opportunity is enormous. Were the Chinese shares of this top 10 to fall to Hong Kong prices, $192bn of market capitalisation would be lost. Were Hong Kong shares to trade up to Chinese prices, market cap would rise by $75bn.

Normally, such a big gap would not happen. The American Depositary Receipts of China Life's "H" shares trade within a whisker of their Hong Kong price, indicating arbitrageurs are alive and well. But Chinese shares are special. There are technical barriers to arbitrage on the Shanghai exchange, for example restrictions on short selling, although some ingenuity might get around these. The real problem is capital controls, which prevent speculative portfolio flows. These in turn are a feature of China's fixed exchange rate policy, which is not going to change any time soon.

Can anyone exploit the $75bn arbitrage opportunity? Companies can. They could raise equity in Shanghai and use the proceeds to repurchase Hong Kong shares at a premium to their market price. Whether state-controlled companies are prepared to exploit so openly the appetite of mainlanders to overpay for equity is doubtful. But they are now doing something similar by raising money in Shanghai to buy real assets, to which Hong Kong shareholders will have a pro rata claim.

PetroChina (NYSE:PTR) has just said it will raise $6bn. Others without Shanghai listings such as CNOOC and China Mobile should pile in too. They will help prick a bubble and raise dirt cheap capital, which should keep the state and foreign investors happy. Pity, though, China's punters.