Chinese traders snap up US$7.5 billion worth of cheaper Hong Kong shares of dual-listed companies in busy August

Net inflow into Hong Kong stocks through the southbound Stock Connect surged in August to US$7.5 billion, as mainland investors snapped up shares listed in Hong Kong that were trading at attractive discounts compared to their China-listed counterparts, analysts said. The August inflow was the third largest recorded since the Stock Connect was launched in November 2014, said Frank Benzimra, head of Asia equity strategy at Societe Generale. The surge comes as an index tracking the average price difference of companies’ shares listed in both markets shows that the usual premium paid for China-listed shares has grown since last November. The so-called Hang Seng Stock Connect China AH Premium Index tracks the average price difference of A shares over H shares for the most liquid Chinese companies that are dual listed in Hong Kong and the China domestic markets – in Shanghai and Shenzhen – that are traded through the Stock Connect. Hong Kong protests 2019 vs Occupy Central: after 79 days, retailers, investors, developers hit far worse by this year’s demonstrations An index value of more than 100 indicates that A shares are trading at a premium versus H shares. On November 29, the index was at 115.28. At Friday’s close, it was at 128.36. Last month, on August 14, it was at 132.60 – meaning China-listed shares cost more than 30 per cent more than their Hong Kong-listed counterparts. A shares have been more expensive than their Hong Kong-listed counterparts since the first Stock Connect was launched in November 2014, according to data at the Hang Seng Indexes website, which shows the all-time high reached nearly 150 in July 2015, the summer when China suffered a market meltdown. Hong Kong’s stock market has always bounced back strongly after big protests in the past. Will it this time? “Over the past four years of the Stock Connect operation, a premium of 30 per cent is often a signal indicating stronger buying interests and inflow into Hong Kong stocks. Such sizeable spreads have become very attractive for mainland investors to buy the cheaper H shares using the money they got from selling the A shares in the domestic market,” he said. On August 26, the date when the highest daily net buying inflow was recorded through the Shanghai southbound totalling 3.7 billion yuan, for example, dual-listed stocks financial stocks such as China Construction Bank, Ping An Insurance, Citic Securities, and Industrial and Commercial Bank of China drew heavy buying interests from mainland investors. “For the most part, since the Shanghai Stock Connect has started operating, the Hong Kong stock connect China AH premium index has been hovering at around 125 per cent level with a few exceptions, such as January 2018,” Benzimra pointed out. Chinese companies report slowed second-quarter profit growth as weaker economy, US-China trade war bite into earnings The Stock Connect southbound allows mainland investors to buy Hong Kong shares through their accounts with the Shanghai and Shenzhen bourses. Given that the average monthly southbound inflow in the previous 12 months to July of this year was just US$800 million, the August inflow was surprisingly high, Benzimra said. He attributed the sizeable A share premium to the strong Chinese equity performance this year. The Shanghai Composite Index was up 20.2 per cent year-to-date at Friday’s close, posting a strong performance than the S&P 500, which is up 18.8 per cent in 2019. The Hang Seng Index has risen only 3.3 per cent this year. The strong Shanghai benchmark performance was driven by Chinese companies’ resilient earnings growth compared to their US counterparts. For example, market expectations for earnings growth for Chinese companies was for 2019 earnings per share (EPS) to grow by 11 per cent to 12 per cent from 2018, Benzimra said. Based on the first half results reported by Chinese listed companies, they are on track to reaching that expectation, he said. “This compared to companies in the S&P 500, whereby there have been a lot of EPS downgrades, to zero in many cases. Such expectations have vanished as their second quarter earnings have shown negative growth,” he said. Southbound investors often prefer Chinese banks and insurance companies due to their high daily turnover in both markets. However, Xu Lei, an analyst with Shenwan Hongyuan Securities based in Shanghai, said generally, putting aside the spike in August, fund managers’ interest in investing in Hong Kong stocks declined this year. “The net asset value performance of Hong Kong equity funds has lagged that of pure A share funds. This has impacted on investors’ overall interests into Hong Kong equities,” Xu said. As an example, cumulative net asset value – a fund’s per share market value plus dividend distributions – of a mid-small cap growth equity fund managed by China Southern Asset Management, a leading Chinese manager, was at 1.2 yuan; while a fund with a similar strategy invested into Hong Kong stocks was at 1.05 yuan.

Chinese traders snap up US$7.5 billion worth of cheaper Hong Kong shares of dual-listed companies in busy August

.css-1mniedq{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;} Inflow through the southbound Stock Connect was the third highest month on record Mainland companies’ strong earnings led to pricier A shares in domestic stock markets

Inflow through the southbound Stock Connect was the third highest month on record

Mainland companies’ strong earnings led to pricier A shares in domestic stock markets