Hong Kong’s red-hot stock market has taken a pause after stocks favored by southbound investors plunged on Monday.
It’s reported that Chinese authorities have suspended approval of certain new mutual funds that are meant for investing in Hong Kong’s equity market.
The China Securities Regulatory Commission (CSRC) has given the green light to Chinese mutual funds that allocate a significant amount of capital to Hong Kong equities since the launch of stock connect links.
Such funds can be broadly classified into two groups — those that allocate at least 80 percent of their portfolio to Hong Kong equities and those that cap their Hong Kong equities weighting at 50 percent.
The CSRC has only suspended the approval of the former category, according to a report in fund media China Fund.
Statistics show that mainland Chinese funds poured 11.46 billion yuan into the Hong Kong equity market in the past week alone.
The Hong Kong stock market has attracted more than 85 billion yuan of Chinese capital inflows since early October.
This massive capital inflow has pushed up numerous mainland property plays, automobile stocks, shares of smartphone parts makers, mainland insurance counters as well as shares of tech giant Tencent, among names favored by Chinese investors.
There are 39 newly established Chinese mutual funds focused on the Hong Kong market this year, raising up to 31.5 billion yuan, according to CSRC data. A total of 123 such funds are available for sale on the mainland market. These funds have posted an average return of 19 percent year to date, far outperforming the 7 percent increase in the Shanghai Composite Index.
Given the favorable investment experience, more Chinese investors are expected to come as they typically prefer to ride on the momentum.
In fact, Chinese mutual funds focused on the Hong Kong market are highly sought-after at present. A newly launched fund can easily receive more than 1 billion yuan of subscriptions on the first day. Some funds are so popular they have to adopt a quota allocation system, or give priority to big clients.
But the spiking outflow of funds from China to Hong Kong could raise concerns.
For starters, Chinese policymakers may worry that massive southbound capital may create another stock market bubble. That would not only threaten Hong Kong’s financial stability but also hurt a large number of mainland investors and hence destabilize the mainland’s financial system.
Second, China’s 19th Party Congress stressed that the stock market should serve the real economy. The authorities have normalized the IPO approval process, but if funds keep flowing across the border, there will not be enough to support fundraising activities in the A-share market.
Allowing funds that can only allocate a maximum of half of their assets to Hong Kong equities will continue to support the China-Hong Kong stock link while limiting the fund diversion impact on the domestic market.
But the sell-off is likely to be temporary. The current valuation of the Hong Kong market remains attractive for mainland investors compared with the valuation of the mainland or US markets. As such, southbound capital would continue to find its way to Hong Kong.
Funds, for example, can use the QDII channel instead. Mainland individuals can also invest in Hong Kong shares directly instead of through funds.
This article appeared in the Hong Kong Economic Journal on Nov. 28
Translation by Julie Zhu
[Chinese version 中文版]
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