China's proposed green light to let Hong Kong red chips list on the mainland is not likely to help shrink the huge price gap between stocks traded on the two markets in the short term, industry analysts said yesterday.

The country's securities regulator is on track to allow red chips, or overseas-incorporated Chinese mainland firms listed in Hong Kong, to issue yuan-backed A shares in Shanghai within the year.

Media reports said last week that China Mobile may become the first red-chip company to sell stocks on the mainland as early as the first half of the year as the market watchdog kicks off the pilot program.

"The scenario (of mainland stocks trading at a premium to Hong Kong shares) won't change because of the return of red chips," said Zhou Xingzhen, a Beijing-based analyst with Southwest Securities Co. "The markets are quite separate."

Fifty-two companies with dual listings saw their yuan-denominated shares trade at an average premium of 116 percent to their Hong Kong-listed counterparts on Monday, according to Southwest Securities.

Capital can't flow freely between the mainland stocks bourses and the Hong Kong market, which means that direct arbitrage activities are impossible. China is considering allowing mainland citizens to trade Hong Kong stocks but no timetable has yet been given.

"As long as capital is restricted, Hong Kong stocks, whose valuations are closer to the international average, will trade at a discount to mainland equities," said Wu Ke, a Zhongtian Investment Consulting Co analyst. "In the short term, the phenomenon won't alter."

Industry analysts also noted that mainland stocks are likely to be further bolstered by the Beijing Olympic Games after recent corrections, while Hong Kong shares are more volatile to the possible global economic slowdown this year. "I believe A-share investors can still enjoy hefty gains this year," said Southwest's Zhou.

(Shanghai Daily February 21, 2008)