Federal Reserve chair Janet Yellen said Donald Trump’s victory won’t change the plan for a rate increase “relatively soon,” sending the US dollar index higher and putting further downward pressure on the renminbi.
A bullish US equity market and expectations of a slew of economic stimulus plans under Trump’s administration also point to higher US interest rates and thus a stronger dollar in the near term.
Although China’s macro policy remains prudent, economic reform and restructuring are well on track and economic fundamentals don’t justify a sustained devaluation of the Chinese yuan; short term pressure will last for a while.
Factors like capital outflow and worsening balance of payment also weigh on the renminbi.
Given the currency softness, the low valuation of the Hong Kong equity market compared with Chinese domestic shares and the imminent launch of Shenzhen-Hong Kong Stock Connect, a weak renminbi may actually trigger a surge in interest for mainland investors to buy Hong Kong equities once the scheme is up and running.
The Shenzhen stock link program will scrap the overall quota but retain the daily quota and it would include small-cap stocks with market cap above HK$5 billion.
That would make it a good complement to the existing Shanghai-Hong Kong Stock Connect.
Several categories of Hong Kong-listed shares could be particularly attractive to mainland investors.
First are companies that are going to directly gain from the stock connect scheme, like brokerages and Hong Kong Exchanges & Clearing (00388.HK).
Chinese investors typically like fast-growing small and mid-cap plays. These are therefore worth following.
Provided the company fundamentals are positive, H shares trading at a deep discount to their A-shares will draw much attention.
Companies with stable businesses and pay a high stock dividend may also become core investment targets.
Lastly, companies with a market value close to HK$5 billion would be closely tracked for their potential to reach the investment threshold for inclusion in the stock link.
This article appeared in the Hong Kong Economic Journal on Nov. 21
Translation by Julie Zhu
[Chinese version 中文版]
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