23 October 2016
Mainland investors drove the Hang Seng Index to a seven-year high on Thursday last week. Photo: Bloomberg
Mainland investors drove the Hang Seng Index to a seven-year high on Thursday last week. Photo: Bloomberg

More mainland capital to fuel HK stock bonanza

The local bourse has diverted the limelight from the mainland market where investors scrambled for Hong Kong-listed Chinese counters under the stock connect scheme, driving the Hang Seng Index to a seven-year high.

The benchmark Hang Seng Index closed at 27,272 before the weekend as capital from across the border flowed into potentially lucrative “shadow A shares”, H shares that have A share counterparts. 

The index has been on a winning streak since early this month as mainland investors used up the southbound quota of the Shanghai-Hong Kong Stock Connect for the first time since the link was established in November last year.

The 10.5 billion yuan (US$1.69 billion) daily quota, underutilized in previous months, now looks inadequate with the surge in demand.

Group chat platforms like WeChat are abuzz with frenzied discussions about ways to pump money across the border, according to mainland media reports. Many are seeking advice on the best way to convert millions of yuan into Hong Kong dollars.

Analysts forecast that the rally is far from over. Some expect the benchmark index to reach 30,000, despite some likely consolidation in the short term, as an investment strategist at Standard Chartered told the Hong Kong Economic Journal.

Buoyant transactions and the continuous inflow of capital — many made through unregulated channels like underground banks — are believed the cause of rare fluctuations in the renminbi-Hong Kong dollar exchange rate.

This has prompted the Hong Kong Monetary Authority to purchase US$400 million in the foreign-exchange market last Thursday to stabilize the local currency, which has been nearing the edge of an exchange-rate trading band against the greenback that the de facto central bank seeks to maintain. The move, the first in more than half a year, is equivalent to a capital injection of HK$3.1 billion.

Writing on his blog, HKEx chief executive Charles Li Xiaojia urged investors to “take a deep breath” and “be prudent” as “there’s no need for mainland or international investors to rush” into the market. “The stock connect bridge is crowded with traffic now,” he said, warning that despite the seemingly endless opportunities, the market is not without risk.

Shadow A shares, or dual-listed shares with a relatively wide price differential, are a big draw. Mainland investors bet heavily on these counters, confident that their experience in the Chinese market, along with their investment tactics and philosophy, can also work well in Hong Kong. In fact, many commentators now believe Hong Kong-listed stocks, especially certain types of Chinese stocks listed locally, have turned into “Hong Kong A shares”.

Another attraction is that while a mainland stock ceases trading when its price hits the daily cap of 10 percent rise (or decline), Hong Kong does not have such a restriction. Also, compared with the growing volatility in the A-share market amid a rally that started at the end of last year, mainland investors view Hong Kong as a frontier and full of untapped opportunities.

Analysts warn that fund flows from the mainland are not the only thing determining share prices. Mainland investors also need to be mindful of short-selling activities. Small and medium-sized firms could also issue new shares when the price is inflated and dilute the per-share value of their stocks. 

As Hang Seng Index soared, Chinese stocks in the US market also rebounded in the past week. Xinhua notes in a commentary that this suggests the international investment community has regained confidence in China’s economic outlook.

According to HKEJ, the ongoing Hong Kong rally has just pushed the price of these counters back to the level before last year’s sharp fall, which was triggered by an exit of capital amid fears of interest rate increases. The bubble may only appear when small and medium-sized stocks issue new shares in batches.

The heady show is expected to be sustained as local brokerages have been calling on Chinese authorities to loosen the daily limit on southbound quota and scrap the 500,000 yuan asset threshold for mainland investors.

Christopher Cheung Wah-fung, a lawmaker representing the financial services sector, expects the quota to be doubled soon.

If this happens, and the long-awaited Shenzhen-Hong Kong stock connect is finally launched, the staggering amount of mainland capital will have more channels to get into Hong Kong.

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EJ Insight writer

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