The China re-price

China's 'plenum premium' comes too soon

Global investors shunned Chinese stocks for most of 2013. Now they are coming back, tempted by low valuations and a 60-point reform plan issued after the ruling party's "third plenum" meeting. Chinese companies' Hong Kong-listed shares now trade at higher prices than their onshore equivalents - a phenomenon rarely seen in five years. This "plenum premium" comes too soon.

The new reform blueprint will encourage those making a case for Chinese stocks. It promises to broaden capital markets and increase private ownership of state-owned companies. A registration-based approach to initial public offerings may allow the market, not the securities regulator, to decide the timing of stock issues, potentially ending a year-long moratorium. Other reforms, like the promotion of privately capitalised financial institutions, should also create more long-term demand for equities.

Such a shift would benefit securities underwriters like Haitong and CITIC Securities, whose shares were both up more than 11 per cent on November 18. Deeper securities markets also seem, at first glance, to justify the eight per cent gain in the shares of insurers China Life and Ping An.

Still, investors snapping up Chinese stocks on the back of China's planned reforms are braving some obvious contradictions. The country's rulers have pledged to maintain the dominance of state-owned companies, but let private ones thrive. They want to strengthen the local stock market, which should draw in more funds, but also loosen capital controls, which would presumably see more cash leak overseas. Moreover, even if the changes benefit China's GDP, the country's stock market has historically been an unreliable proxy for economic growth.

That leaves plenty of room for reform groupies to be disappointed. Indeed, most investors are still watching from the sidelines. The $5.7 billion that has flowed out of China funds so far this year is more than total outflows from emerging markets globally, according to Morgan Stanley. Only a third of the recently enlarged quota for foreign investors to buy stocks directly in China has actually been allocated. The dividends of reform will be slow in coming - and it will be even longer before they find their way to foreign investors.