HK must be wary of bubble trouble

PUBLISHED : Tuesday, 28 August, 2007, 12:00am
UPDATED : Tuesday, 28 August, 2007, 12:00am

If a week is a long time in politics, then two weeks may be an eternity in the stock market. Yesterday, both the Hang Seng and the China Enterprises indexes hit new heights. Analysts believe the surge was mainly the result of Beijing's decision, announced last week, to allow mainlanders to invest in the local stock market in a scheme which had been expected to open yesterday.

Hong Kong investors were naturally euphoric about the dramatic rises yesterday, especially after this month's turmoil in global markets. But the irony is that the local market was getting both behind and ahead of itself.

Investors have had a week to absorb the news of a potential massive influx of capital from the mainland after the State Administration of Foreign Exchange announced on Monday last week that investors with a minimum of 100,000 yuan would be allowed to buy stocks in Hong Kong without a quota or purchase cap. The local market seemed to have taken its time to digest the news, judging by yesterday's surprising surge, although news of the measure did contribute to a rise last week.

Just a fortnight ago, global markets tumbled on concerns about the subprime mortgage crisis in the US and the general credit crunch it has created. They later recovered, following a US Federal Reserve discount rate cut.

H shares, expected to attract the most interest from mainland retail investors because they are sold at a steep discount to their companies' A shares, have gained more than 27 per cent since August 17. Could the fundamentals have changed so quickly to warrant a complete turnaround in market sentiment after seeing so much fear, panic and unprecedented volatility? Investors should be careful.

As for getting ahead of itself? This came about when dozens of would-be mainland investors were disappointed when they travelled to the Tianjin branch of the Bank of China yesterday on news that the bank would start accepting orders for Hong Kong shares. A bank spokeswoman said while its offices were ready, final authorisation from headquarters had not arrived.

A new report by investment bank Morgan Stanley estimated there could be US$100 billion of mainland capital flowing into Hong Kong under the scheme. But since there were no mainland buy orders yesterday, the surge was driven wholly by euphoric expectations.

The mainland should be applauded for taking steps to loosen capital controls. Opening the door for people from the mainland to invest directly in the Hong Kong market is a move of great symbolic significance. However, there is also a need for some caution. The new scheme will put the local market increasingly under the influence of market conditions on the mainland. Luminaries from former US Federal Reserve chairman Alan Greenspan to tycoon Li Ka-shing and investment guru Jim Rogers warned months ago of a massive bubble building on the mainland.

Bear in mind mainland markets have been largely immune to the global plunges this month. With the new expected capital inflow, Hong Kong is likely to be caught up in an ever bigger bubble from the motherland.