Across The Border

Mainland capital to remain pillar of Hong Kong stock liquidity

Launch of Shenzhen-Hong Kong link, raised trading quota with Shanghai, also likely to push capital inflows higher

PUBLISHED : Monday, 18 July, 2016, 4:11pm
UPDATED : Monday, 18 July, 2016, 11:05pm

The liquidity of Hong Kong’s stock market will continue to be supported by strong capital inflows from mainland China in the second half of the year, according to analysts,

They expect Britain’s exit from the EU to trigger capital flows to other Asian emerging markets, too, but that is likely to go into Asian bonds rather than Hong Kong stocks.

Steven Sun Yu, head of HK and China equity research at The Hongkong and Shanghai Banking Corporation, said foreign institutions turned bearish towards China since the start of the year, and continued to retreat from the Hong Kong equity market in the first half.

But that investment vacuum was filled by a surge in mainland capital heading south, via the Shanghai-Hong Kong Stock Connect.

“This is only a beginning. The capital inflow from the mainland will climb higher, depending on how big the channel becomes,” Sun said, adding the launch of the Shenzhen-Hong Kong Stock Connect, now likely in September, would further accelerate the pace.

This is only a beginning. The capital inflow from the mainland will climb higher, depending on how big the channel becomes
Steven Sun Yu, head of HK and China equity research at The Hongkong and Shanghai Banking Corporation

During the first half, 33 per cent of the total 250 billion yuan (US$37.4 billion) quota for southbound trading within the Shanghai-Hong Kong stock linkup, or 84 billion yuan, was utilised by mainland investors, and 23 per cent of the total came in May and June alone, despite a relatively flat market.

Banks, including China Construction Bank, HSBC and Industrial and Commercial Bank of China absorbed most of the capital, followed by Tencent Holdings and Sinopec Corp.

The accelerated southbound flow meant the available quota was only 49.4 billion yuan by July 14, or 19.8 per cent, propelling expectation the Hong Kong bourse would soon announce new arrangements to raise the quota, and the launch date of the Shenzhen stock link.

Over time, HSBC’s Sun said the Hong Kong market will see a change of structure, given the rising capital flow trend.

Mainland capital made up 8.6 per cent of Hong Kong’ s cash trading market value from October 2014 to September 2015, up from 5.1 per cent year on year and was the third highest among cross-border origins, only next to the UK and US, according to the Cash Market Transaction Survey by Hong Kong bourse.

Jason Sun Xianbing, Citigroup’s chief China strategist, said the southbound capital injection in the first half has been large enough to support Hong Kong’s liquidity and offset the outflow, including roughly a US$6 billion redemption from Greater China funds, and over US$2 billion outflow through the northbound stock connect.

Citi’s Sun said the trend would continue, driven by the yuan’s weakness and the cheap valuation of Hong Kong stocks in the eyes of mainland investors.

Higher inflation in the mainland compared with the United States —which lowers the yuan’s actual value — is also forcing more mainlanders to seek outside investment, HSBC’s Sun said. China’s inflation rate was 1.9 per cent in June, compared with 0.3 per cent in the US.

Some investors expect a capital flow from European markets to Asian emerging markets to avoid the Brexit turmoil, and ultimately this could benefit Hong Kong stocks.

However market watchers said the chances if that were slim.

“I don’t think Brexit is a good reason for investors to move into Asian equities, but it may be a good reason to chose Asian fixed income products,” said Hui Tai, chief market strategist Asia at JP Morgan Asset Management.

“European investors need to look abroad for higher yield [due to the negative interest rate environment in Europe] and that will naturally benefit Asian fixed income,” Hui said.

He added, however, the Asian equities market cannot be considered a safe haven for investors seeking to avoid the Brexit fallout, as Asian markets were just as volatile the 48 hours after the UK referendum results were announced.

Asian equities may be cheap, said Hui, but that alone is not a reason to encourage investors to pile in.

“We had good catalysts at the start of the year, including signs the US dollar was peaking out, a stabilisation in the oil price, and in the China economy.

“They were good reasons for bargain hunters to come into Asia. But once these factors are priced in or exhausted, they need earnings growth, and that’s not happening at this moment,” Hui said.

Thomas Poullaouec, Asia Pacific head of strategy & research at State Street Global Advisors, also underlined that investors need more reasons to shift into Asian equities markets, and pointed out they should always consider assessing sustainable earnings growth of target companies.

A risk-off sentiment after Brexit isn’t, he agreed, a strong enough reason to push investors into another volatile market.

Analysts remain conservative, too, on the Hong Kong stock market amid lingering concerns over China’s economic growth.

In a latest note, Credit Suisse analyst Vincent Chan lowered its annual target for the Hang Seng Index this year from 23,000 to 22,000, following the downgrade of China’s economic growth target from 6.6 per cent to 6.5 per cent, and the yuan’s forecast for 2017 from 6.98 to 7.11 against the US dollar. HSBC’s Sun gave the target of Hang Seng Index for the year end at 21,000.