Across The Border

Hong Kong stocks lifted by tide of money from mainland investors

Hong Kong stocks rose for a ninth straight session on Thursday, lifted by rising fund flows from mainland investors seeking Hong Kong blue chips

PUBLISHED : Thursday, 20 July, 2017, 5:09pm
UPDATED : Thursday, 20 July, 2017, 10:24pm

Mainland Chinese and Hong Kong stock markets have become sharply divergent, as money is leaving the mainland in search of shelter in Hong Kong following recent share price declines among start-ups and other young technology companies.

Analysts expect southbound inflows to further increase in the second half of the year, with internet and financial stocks to receive a particular boost.

In just eight trading sessions through Wednesday, Hong Kong’s market value increased by a whopping HK$1.32 trillion (US$169 billion) to HK$29.8 trillion.

During these eight sessions, southbound flows to Hong Kong recorded by the official Stock Connect schemes amounted to 19 billion yuan (US$2.81 billion).

The Hang Seng Index also recorded a nine-day bull streak by Thursday’s close, the longest stretch of increases since October 2012.

“The continuous rally in Hong Kong stocks coincided with a plunge in the A-share market,” said Han Zhili, a strategist for Essence Securities.

“One major reason behind the divergence [between the two markets] is the exodus of capital from the mainland,” he said. “A-share capital keeps pulling out of smaller cap stocks to flow into Hong Kong.”

According to a forecast by Goldman Sachs earlier this year, southbound flows via the Stock Connect schemes could reach US$54 billion in 2017, significantly higher than last year’s US$32 billion.

“Southbound flows have outpaced Northbound buying since late 2015 and it has picked up pace further in recent months,” Goldman analysts said in a recent research note.

The cumulative southbound net buying from November 2014 to May 2017 had reached US$70 billion, more than double the US$38 billion of northbound net buying during the same period, according to Goldman.

For mainland investors, Tencent is a favourite.

On Wednesday Tencent saw net buying of HK$383 million via the Stock Connect. It marked the 3rd straight day the stock has seen net buying by mainland investors.

Tencent’s share price has also repeatedly hit fresh record highs in the past few days, rising atop HK$300 per share on Thursday morning, but eventually ended the session down 0.3 per cent at HK$297.0.

So far this year, Tencent has soared more than 50 per cent, outperforming the Hang Seng Index, which has also jumped 21 per cent during the period.

HSBC is another favoured holding.

On Wednesday, HSBC saw net buying of HK$82 million via the Stock Connect, reflecting the fourth straight day buyers from mainland China outnumbered sellers.

Chinese insurers are also in the spotlight.

From July 11 to July 17, Ping An Insurance attracted more than HK$360 million through the Stock Connect, while China Life Insurance attracted HK$8.4 million, according to estimates by Credit Suisse.

Analysts said the exodus of mainland capital may be because investors are spooked by Beijing’s financial crackdown, while there is also a growing sense of unease about the Chinese leadership shuffle this fall.

On Monday, the mainland’s Nasdaq-style ChiNext Price Index sank 5.1 per cent, wiping out gains made in the past two years.

“The mainland’s startup board is overheated. The skyrocketing prices of many hot stocks are too detached from the fundamentals. It’s inevitable for the bubble to burst,” said Li Tao, senior analyst for Citic Securities.

In the short term, investors are focused on an unusual top-level financial policy meeting over the weekend, which sends a clear signal that senior leaders are determined to continue the financial crackdown on leveraged buying and speculative investments.

The meeting, usually hosted by the premier, was chaired by President Xi Jinping. As a tradition, the quinquennial meeting sets the policy tone for the next five years.

Adding to the policy concern, a number of listed startups have issued warnings about significant interim losses, including the high-profile Leshi Internet Information & Technology, once a star company on the ChiNext board.

“Pessimism is increasing sharply about an tightening and prolonged regulation, sparking a rapid retreat of momentum investors from the market,” said Wang Sheng, an analyst with Shenwan Hongyuan Securities.

A deeper concern may be the significant political uncertainty in the second half of the year, analysts said.

China’s top leadership will gather this fall to hold the 19th National Congress of the Communist Party, which will decide who to lead the ruling party in the next decade.

Although “maintaining stability” is typically the policy tone near crucial political events on the mainland, the volatility of stock markets usually increases in times of uncertainty.

In 2012, when the 18th Party congress was held, the Shanghai Composite Index had registered a 3 per cent gain for the year, significantly lagging behind regional peers. In comparison Hong Kong’s Hang Seng Index jumped 23 per cent.

“Although the economy has shown signs of stabilising, there are still many uncertainties [this year], including the 19th National Congress of the Party,” said Xiao Shijun, an analyst with Guodu Securities.

“The policy makers have been striving to maintain stability, including stemming capital outflows, stabilising the exchange rate, and curbing financial bubbles. But this is a severe task.”