China Shares in Hong Kong May Jump on Study to Allow Arbitrage

By Chen Shiyin and Lu Wang

Oct. 18 (Bloomberg) -- Chinese stocks trading in Hong Kong may advance today after Beijing regulators said they may allow arbitrage between shares traded on the mainland and the city.

China Petroleum & Chemical Corp., Aluminum Corp. of China and China Life Insurance Co. may gain after surging in U.S. trading. The USX China Index, which tracks U.S.-traded shares of 74 mainland companies, jumped 8.3 percent yesterday, the biggest rally since April 2001.

Limits on inward and outward investment have helped the CSI 300 Index almost triple this year, making the Hong Kong-traded shares of Chinese companies a cheaper alternative for investors. The securities regulator said yesterday it will study a plan to end price discrepancies amid concern a bubble is building.

The mainland Chinese market is ``overpriced,'' said James Moffett, manager of the $3.62 billion UMB Scout International Fund in Kansas City, Missouri. ``Our strategy is to try to invest in China without actually investing in China.''

The CSI 300 has jumped 185 percent this year, the biggest advance among the 90 equity indexes tracked by Bloomberg. It's valued at an average 56 times reported earnings, compared with 31 times for the Hang Seng China Enterprises Index. The Hang Seng China Enterprises, a measure of 43 so-called H shares of Chinese companies, has gained 81 percent during in 2007.

Tu Guangshao, vice chairman of the China Securities Regulatory Commission, said in Beijing that the panel is studying a proposal to allow swaps in shares of companies traded on domestic and Hong Kong exchanges. ``We will announce the result of the study soon,'' he said.

Sinopec, China Life

U.S.-traded receipts of China Petroleum, Asia's biggest refiner also known as Sinopec, soared 16 percent to $178.83, or the equivalent of a 13 percent gain from its Hong Kong close. The stock traded at 16 times estimated earnings in Hong Kong, compared with a multiple of 36 in Shanghai.

Those of Aluminum Corp. of China, the nation's biggest producer of the metal, surged 13 percent to $88.05. That's 13 percent higher than the stock's closing price in Hong Kong. China Life Insurance Co., the largest insurer, increased 12 percent to $106.56 in New York, representing a 8.3 percent gain from its Hong Kong close.

Shares of companies that plan to sell yuan shares may also advance in Hong Kong.

U.S.-traded receipts of China Mobile Ltd., the world's biggest wireless carrier by users, advanced 9.7 percent to $98.77, 3.6 percent more than its Hong Kong close. PetroChina Co., which this week overtook General Electric Co. as the world's second- largest company by market value, gained 15 percent to $263.70. That's 9.3 percent more than its share price in Hong Kong.