NEW YORK (TheStreet) -- You might not have seen this in the news, but Hong Kong and China agreed to an historic hook up. The two have linked the Hong Kong and Shanghai stock exchanges for the first time.
That represents a huge investment opportunity -- albeit one that is under-appreciated, even unknown, here at home.
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Now, foreigners who never before had access to China's main class of shares can trade them directly through Hong Kong, while Chinese investors who never before had access to Hong Kong shares can trade them through Shanghai.
This is huge.
And it's the reason why, a week before the announcement, I recommended that my newsletter subscribers prepare for this moment by buying the one Hong Kong stock that will clearly be the single-biggest winner as the agreement unfolds. Already those shares are up 8% in just a few days.
That growth will continue, and you can play the trend to a lesser degree here in the iShares MSCI Hong Kong ETF (EWH) .
Growing Demand for Hong Kong Shares
The agreement works on two levels. First, it allows foreign investors to trade Chinese shares. China has operated a bifurcated stock market through the Shanghai Stock Exchange for years. Only Chinese investors could buy so-called "A shares," while "B shares" were available only to foreigners. That created huge disparities between the share classes.
For one, there are far more -- and far-more interesting -- A shares than B shares. So, individual foreign investors who wanted to own some of the best companies in China were simply out of luck. Second, the Chinese typically view the stock market as a financial-oriented casino and routinely bid A shares up to ridiculous valuations. Meanwhile, Western investors have typically applied traditional financial analysis to the Chinese market and awarded B shares a valuation far less rich than the Chinese give the A shares.
That will now go away, creating unique hedging opportunities as the valuations between A and B shares narrows.
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