Capital inflows by mainland Chinese investors in HK bourse to hit 200 billion yuan next year

Capital inflows by mainland Chinese investors into the Hong Kong stock market is expected to hit 200 billion yuan (HK$229.1 billion) next year and account for almost 20 per cent of the estimated annual equity turnover in the city, analysts from UBS Securities said on Monday.

“The biggest opportunity for the Hong Kong bourse next year will be the southbound money flows from mainland China,” said Lu Wenjie, the market strategist for UBS Securities.

The total size of the southbound flows might have reached 150 billion yuan to 160 billion yuan this year, according to UBS’ estimates. That is slated to reach 200 billion yuan next year, Lu said.

“It would be close to the IPO market size in Hong Kong,” he added.

In 2015, Hong Kong overtook New York as the world’s biggest IPO market, with the amount of funds raised through IPOs reaching HK$261.3 billion.

Money from mainland buyers accounted for 12 to 13 per cent of Hong Kong’s total equity turnover so far this year, up significantly from the average 9 per cent in 2015 and 5 per cent in 2014, Lu said.

That ratio will further increase next year to 17 to 18 per cent, he said.

One big driver of the anticipated surge in southbound flows is the stock trading links, including the existing Shanghai-Hong Kong Stock Connect and the upcoming Shenzhen-Hong Kong Stock Connect, which is scheduled to launch later this month.

On the other hand, “mainland Chinese investors like buying Hong Kong stocks, as they want to diversify their assets due to yuan depreciation risks and falling returns from mainland assets,” Lu said.

Last but not the least, “it’s an irresistible trend for Chinese companies to go global, as they want to expand into international markets and integrate into the world economy,” Lu said.

“We don’t expect the general trend to fade out in the short term, even if the yuan starts stabilising,” he added.

Among the composition of southbound flows, the money from mainland insurance companies makes up for almost 57 per cent, while the rest is from mutual funds, private funds, pension funds, commercial banks, and individual investors, according to UBS.

“The majority is from institutional investors, which means the flows should remain steady,” Lu said.

He also expected the MSCI China index, which consists of representative Chinese companies listed in Hong Kong, to see double-digit earnings growth in 2017.

In particular, cyclical sectors such as the infrastructure industry may experience significant increases.

“Although the economy is slowing down, China’s money supply has been growing fast. The majority of the new credit has entered the real estate market this year. But due to the property tightening in October, the money may flow out of the real estate sector into the infrastructure sector, supported by local governments,” he said.

According to analysts from Macquarie Research, investors could overweight China’s cyclical sectors, which have the greatest earnings upgrade potential.

“The smooth transition in the Chinese leadership and accelerated credit growth have seen China’s economic growth stabilise,” Erwin Sanft, head of China strategy at Macquarie Research said on Monday.

Among specific industries in the MSCI China index, consumer discretionary and industrial sectors may see their 2017 earnings growth rise to 26 per cent and 18 per cent respectively, Macquarie said.

The energy sector in the index should also experience a significant earnings growth in 2017, as oil prices are higher than the year-ago levels, the report said.