Ball Is Rolling - H-Shares

As mentioned in my previous posting, one of the driving factors why I view the recently listed China covered warrants favourably is the likelihood of them being brought back to mainland for listing. The mainland regulator has just opened the door for more Hong Kong- traded red chips to list on the domestic bourses. The net income requirement has been lowered to HK$2 billion over three years, from HK$1 billion annual profit. According to a draft document obtained by the Beijing-based Caijing magazine, new rules for red-chip listings have been finalized. The new requirements could make 22 red chips eligible to list in the mainland.

The major difference between the new draft rules and those that the state is that the net profit requirement has been relaxed. The criterion which prohibited companies whose parent is listed on the domestic market from selling shares has been removed by the China Securities Regulatory Commission.

These changes will make 22 Hong Kong- listed red chips eligible to apply for a domestic share issuance. In addition to blue chips China Mobile (0941), China National Offshore Oil Corporation, or CNOOC (0883) and BOC Hong Kong (2388) - seen as frontrunners for listing - other enterprises such as Shanghai Industrial (0363) and Lenovo (0992) will now be eligible. China Overseas Land (0688), which also becomes eligible, abandoned plans for a domestic float last month since the parent company is listed in Shanghai and would not meet prevailing criteria. Among other requirements, companies aiming to return to the domestic market are required to have been listed in Hong Kong for at least a year, with market capitalization of HK$20 billion or more. Half of their business and net profit should be generated from the mainland.

The CSRC has been encouraging big-cap red chips to return to the domestic market, as it seeks to improve the quality of the bourses. Initially, the CSRC aims to attract only large corporations and may not encourage small enterprises. Once things have been planned by Beijing, the rest just falls into place, the companies will have to toe the line. The CSRC sees this as a major step to improve choices for mainland investors - one of the main reason why Shanghai and Shenzen bourses are so frothy: the lack of good companies. The H-shares are regarded as a few rungs better run than those in the mainland, and would be given a better pricing when they go back.

I would expect the shares to move up gradually as this process gathers speed. This gives the China Mobile and PetroChina covered warrants another kicker.