HONG KONG shares in dual-listed mainland firms are trading at deep discounts to their onshore versions, despite the recent launch of the Hong Kong-Shanghai stock connect program that channels cross-market stock investment between the two markets.

    The lack of price convergence has confounded fund managers and revealed shortcomings in the stock connect’s design because shares are not fungible between exchanges.

    Theoretically, because the stock connect enables two-way investment flows, prices should converge as investors arbitrage away the differential.

    That has not happened. The A-H share premium index, which measures price differences for dual-listed companies in both markets, has risen sharply since the stock connect launched in mid-November.

    A value over 100 indicates that shares in dual-listed companies are cheaper in Hong Kong than in Shanghai. On Tuesday, it stood at 111.94, its deepest discount since July 2013.

    Bank of Communications, one of China’s five largest banks, closed at 5.96 yuan (HK$7.52) in Shanghai on Tuesday, but in Hong Kong it traded at HK$6.58 (5.22 yuan), a 12 percent discount.

    Tianjin Capital Environmental Protection Group’s Hong Kong shares traded at half its price on the Shanghai bourse.

    Olivier D’Assier, Asia Pacific managing director for Axioma, a risk management company that helps design stock indices in China and elsewhere, blamed speculators.

    He said the chasm between the indices narrowed dramatically in the run-up to the stock connect’s launch, but quickly reappeared once trading began. “The gap narrowed because speculators thought people are going to jump on this, but they didn’t, so now [the speculators] are selling back,” he said.

    D’Assier was referring to the weak take-up of the program’s investment quota. Southbound flows from mainland investors were anemic — unsurprising considering the paperwork and capital requirements — and foreign inbound flows have been slacker than expected due to technical and legal concerns.

    “Just opening the door a little crack and not changing any of the policies wasn’t going to be enough,” said D’Assier.

    Unfortunately for traders, there is no easy way to profit from the distortion because the shares are not fungible — mutually interchangeable.

    “Keep in mind that true arbitrage is not possible through stock connect. That is, you can’t buy through stock connect and sell onshore and vice versa,” said Nick Ronalds, head of equities at industry association ASIFMA. (SD-Agencies)