The Hong Kong stock market is highly influenced by national policy, liquidity and retail investors’ preferences. As a result, it has shown increasing volatility and is easily affected by rumors.
Last week, some small-cap stocks saw their price more than double and then dive more than 30 percent in a single day. There are various reasons for this, but the speculative pattern of certain stocks is very similar to what was happened in the mainland stock market.
As you know, Hong Kong stocks trade freely during regular trading hours without any up or down limit. On the other hand, the mainland market adopts the T+1 settlement cycle, and imposes a 10 percent daily limit. Therefore, the Hong Kong market is much more viable for mainland speculators.
In May 2005, the China Securities Regulatory Commission kicked off the reform of the shareholder structure of listed companies. The move has restored market confidence and lured more investors.
On Feb. 27, 2007, the Shanghai and Shenzhen markets dropped by 8 percent and 9 percent respectively. The two markets lost over 1 trillion yuan in capitalization in just one day, and the turmoil rippled through other markets.
However, Chinese retail investors soon returned to the market amid the rosy economic prospects and ample liquidity. The market quickly recouped its losses.
New stock accounts increased by 100 million in May and 130 million in October. As a result, the Shanghai Composite Index hit a record high of 6,214 points on Oct. 16, and then started to dive.
The last bull market cycle has stemmed from the share market reform, which has tackled the issue of non-tradable stocks. The Chinese currency has shown steady appreciation thanks to foreign exchange reform, which has resulted in an inflow of global capital. The bull market lasted around two years from November 2005 to October 2007.
The subsequent bear market resulted from the global financial crisis as well as the massive shift of capital into the property market. The Shanghai market touched the bottom of 1,849 points in June 2013, and stayed near the bottom for another year. It then started to pick up in mid-2014.
Beijing has demonstrated its intention to bolster economic growth and revitalize the stock market through such measures as the Shanghai-Hong Kong Stock Connect, One Belt One Road, Asia Infrastructure Investment Bank and the forthcoming Shenzhen-Hong Kong Stock Connect.
Both Hong Kong and mainland markets have fared very well in the past six months, even if mutual funds and private equity funds have yet to jump onto the bandwagon.
State-run media have tried to cool down the red-hot equity market without scaring away investors. The move has been used by some speculators to bet on certain small-cap and less popular stocks. Therefore, investors should closely watch market developments.
In the short run, the Hong Kong market will continue to move up on various market rumors. Mainland property stocks will benefit from the latest 0.25 percent interest rate cut.
Relevant stocks under the stock link with Shenzhen and H shares with large discounts to their A- share counterparts will outperform the market as some fund managers are now actively engaged in arbitrage. Sectors driven by national policy will also outperform.
This article appeared in the Hong Kong Economic Journal on May 12.
Translation by Julie Zhu
[Chinese version 中文版]
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