28 October 2016
Chinese insurance companies are likely to benefit from rising demand for healthcare insurance schemes. Photo: Bloomberg
Chinese insurance companies are likely to benefit from rising demand for healthcare insurance schemes. Photo: Bloomberg

Why mainland funds will keep flowing into Hong Kong

The Hong Kong and mainland stock markets have been on a hot streak recently. The Hang Seng Index has broken through 28,000 points several times, and the market’s daily turnover reached over HK$200 billion for at least a couple of days.

Hong Kong-listed mainland companies have witnessed a long-awaited recovery, with investors scrambling to acquire their shares.

This round of market rally has come swiftly with solid support from fundamentals.

The Chinese government has unveiled a raft of easing measures to bolster economic growth. During the Two Sessions held in March, Premier Li Keqiang called for a more powerful fiscal policy and an appropriate monetary policy to support growth.

The People’s Bank of China cut interest rates by 25 basis points in late February following a series of reserve requirement ratio (RRR) reductions. The down payment ratio for a second home has been reduced from 60 percent to 40 percent in a bid to buoy the property market.

Meanwhile, the Ministry of Finance rolled out a 1 trillion yuan local government debt for bond swap program. The move will allow local governments to convert expiring debt into bonds that carry lower yields and longer-term maturities. It is expected to ease short-term repayment pressures for local governments.

All these measures have been largely within expectation but the determination the government demonstrated has boosted market confidence.

In fact, the A-share market has already outperformed since last year. The CSI 300 index soared another 14.7 percent in the first quarter of this year on top of 55.8 percent jump last year.

Much of this year’s rally occurred in March. A large number of retail investors have rushed into the market, with the number of new stock accounts hitting a record high of 1.67 million on a weekly basis.

Chinese authorities are wary of a market bubble and released measures to divert some capital away from red-hot mainland market. Hong Kong is an ideal destination.

Hong Kong-listed Chinese stocks have been underperforming despite sharp gains on the mainland market, creating an attractive value gap. The AH premium index has touched a high of 35 percent in late March.

The China Securities Regulatory Commission has given the green light for mainland mutual funds to access Hong Kong market through the stock connect scheme. The announcement has triggered great interest for southbound trading, and the Hong Kong market has surged as a result.

The upcoming Shenzhen-Hong Kong Stock Connect, along with the inclusion of A shares in global benchmark indices, will become the trigger for a re-valuation of the market. The market rally has just started, and there are ample opportunities in either A and B shares on the mainland or H shares in Hong Kong.

Meanwhile, the insurance industry is in the midst of fast growth. Insurance products will be favored by investors amid the lower interest rate, and the strong A-share rally will improve the investment return of these insurance companies.

Various tax incentives for pension and healthcare insurance products will open new opportunities for them. Investors should look for good insurance companies with attractive valuation.

This article appeared in the Hong Kong Economic Journal on April 22.

Translation by Julie Zhu

[Chinese version中文版]

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Managing director of retail division at Value Partner

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