28 October 2016
Guotai Junan and other Hong Kong-listed brokerage plays are benefiting from the strong market rally. Photo: CNSA
Guotai Junan and other Hong Kong-listed brokerage plays are benefiting from the strong market rally. Photo: CNSA

The bull market party has just begun

Mainland hot money has flowed into Hong Kong’s stock market as A shares have failed to break over 4,000 points. That’s why A shares dropped while the Hang Seng Index and the Hang Seng China Enterprises Index trended upward.

The Hong Kong market may face some correction in the short term, but the upward rally remains intact. Capital has been looking for underperforming sectors such as mainland banks, insurance and Macau gaming plays.

The market rally could put pressure on some foreign funds that have stayed out of the market in recent years.

Chinese authorities will need some time to revise the rules after the China Securities Regulatory Commission allowed domestic mutual funds to buy H shares. A massive inflow of mainland capital will be seen.

Currently, many funds with Qualified Domestic Institutional Investor quota have already used up their quotas. They have been focusing on arbitrage of dual-listed stocks with wide price gaps. A considerable portion of that mainland money has flowed into H shares through the underground banking system.

Hong Kong Exchanges and Clearing (00388.HK) has become one of the biggest beneficiaries of the active trade. Its share price might hit its peak after the government unveiled the Shenzhen-Hong Kong Stock Connect. It is said that HKEx might merge with its mainland rivals for a public listing, which would create the world’s largest and most active exchange.

Shanghai and Shenzhen’s combined market turnover has reached 1.5 trillion yuan (US$241.5 billion). That would boost commission revenue and the bottom line for brokerages. There are also long queues for public listing on the mainland, which would benefit a number of brokerages like China Galaxy Securities (06881.HK).

Investors should closely watch brokerage plays that focus on cross-border stock trading. Southbound funds with a size of over 100 billion yuan are expected to come into place within this month.

Chinese retail investors love to speculate on H shares which have no up limit. These include brokerage plays like Guotai Junan (01788.HK), Haitong International (00665.HK) and Shenyin Wanguo HK (00218.HK). Therefore, the influx will also benefit local brokerages that expand into the mainland market.

Many local brokers reported their online trading systems have jammed because of the record high volume of transactions. That’s definitely good news for them.

Dual-listed stocks with large discounts are a hot topic. China Shipping Container Lines (02866.HK), Sinopec Shanghai Petrochemical (00338.HK), Aluminum Corp. of China (02600.HK), Chongqing Iron & Steel (01053.HK), Maanshan Iron & Steel (00323.HK) and Haitong Securities (06837.HK) all performed well, partly due to the iron ore resource tax cut.

Economic data will indicate whether Beijing will adopt monetary easing or launch further stimulus measures. The consumer price index rose 1.4 percent in March from a year ago. First-quarter GDP growth is estimated at around 7 percent.

The central government has unveiled several stabilizing measures, and state-run media have stressed that the “healthy” market rally is the result of various reforms. It takes time to see the impact of the economic restructuring, while the market has already priced in the optimistic expectations.

Beijing would launch further interest rate and reserve requirement ratio cuts to restore market sentiment. The market rally is set to go on for a while.

This article first appeared in the Hong Kong Economic Journal on April 10.

Translation by Julie Zhu

[Chinese version 中文版]

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Department of Investment Analysis at HKEJ

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