Across The Border

Weak yuan spurs surge in southbound Shanghai-Hong Kong stock connect trade

PUBLISHED : Wednesday, 30 March, 2016, 3:33pm
UPDATED : Wednesday, 30 March, 2016, 3:33pm

A weaker yuan spurred more mainland investors to buy Hong Kong shares via the Shanghai-Hong Kong Stock Connect scheme in the first quarter of the year, slowing traffic that had predominantly been northbound until now.

However, analysts said the trend is unlikely to continue.

The scheme, launched in November 2014, allows mainland investors to buy Hong Kong shares and international investors to purchase yuan-denominated A-shares on the mainland.

Northbound investment into Shanghai had previously dominated traffic via the link, with 305 billion yuan (HK$364 billion) worth of transactions for the first quarter of 2015 being almost four times the 76.57 billion yuan amount heading south.

However, southbound turnover in the first quarter of 2016 shot up 64 per cent year on year to 125 billion yuan, while northbound transactions plunged 41 per cent, narrowing the gap between north and southbound transactions to an unprecedented extent.

By the end of March, total investments heading south lagged behind northbound investments by around 53 billion yuan, or about two-thirds less – a far cry from the situation a year ago, according to statistics from Hong Kong Exchanges and Clearing.

We don’t know when [the QDII] will open again, so the [stock connect] is the only channel for those investors to protect their investment
Benny Mau, Hong Kong Securities Association

Analysts attributed this phenomenon to fears of a falling yuan earlier this year.

“Before the Chinese New Year there was quite a lot of fear in the market that the renminbi would depreciate a lot. So it’s quite natural for [mainland investors] to want to get out of the country and try to park their money in Hong Kong assets via this trading programme,” said Ivan Li, an equities analyst at Tung Shing Securities.

The People’s Bank of China set the official midpoint rate on the yuan 0.5 per cent weaker at 6.5646 per US dollar on January 6, bringing offshore yuan to a five-year low, spurring turbulence in financial markets. Analysts said the daily losses were comparable to the fall seen when the currency was devalued abruptly by almost 2 per cent in August.

Li added that yuan uncertainty also held back foreign investors who were not keen to buy A-shares, causing a setback for northbound trading.

Another reason for the surge in mainland investments was the drawn-out suspension of access to overseas equities by financial regulators via the qualified domestic institutional investor (QDII) scheme since April 2014.

The scheme allows banks and mutual funds to raise capital from Chinese investors before converting it into foreign currencies to buy shares abroad under a quota system.

“We don’t know when [the QDII] will open again, so the [stock connect] is the only channel for those investors to protect their investment,” said Hong Kong Securities Association (HKSA) chairman Benny Mau Ying-yuen.

But recent stabilisation of the yuan means that the trend is unlikely to last, analysts said.

“The US dollar retreated quite a bit just before this week and the US economy is not as good as it seems, with the [number of] interest rate hikes lower than expected, which helped to stabilise the renminbi,” said Li from Tung Shing Securities.

US Federal Reserve chair Janet Yellen’s dovish remarks on Wednesday took into account China’s slowing economy and falling oil prices, factors that helped justify a slower pace of interest rate rises.

“Given the risks to the outlook, I consider it appropriate for the committee to proceed cautiously in adjusting policy,” Yellen said on Wednesday.

Li also explained that the macroeconomic data from China in recent months and company results were not as bad as expected, boosting mainland market sentiment.

HKSA’s Mau, on the other hand, believes that the trend of heavy southbound investments would continue at least for the second quarter, or until the QDII scheme restarts.

More than 2.41 trillion yuan has flowed through the Shanghai-Hong Kong Stock Connect scheme since its launch, but the average daily turnover is still considered low compared with the entire market.

In comparison, the Hong Kong stock market turnover in 2015 alone totalled HK$26 trillion.

Major players such as HSBC Holdings, China Mobile and the Industrial Commercial Bank of China (ICBC) are among the most actively traded H-share stocks, while Ping An insurance and liquor manufacturer Kweichow Moutai were the most popular stocks in the A-share market under the connect scheme.

Despite the low turnover, the lack of any “serious mistakes” or “major challenges” to the scheme deem the initiative a successful one, said Mau.

Analyst Li added that the launch of the Shenzhen-Hong Kong Stock Connect, which has been delayed until at least the second half of this year due to market volatility, will encourage foreign investors to inject money into the mainland since it represents the “new economy” dominated by e-commerce and internet industry stocks.