Hong Kong Stock Exchange

China’s regulator to halt Hong Kong-bound funds over fear of an impending market correction

China Securities Regulatory Commission to temporarily delay approval of some mutual fund products that will invest more than 80pc in HK stock market

PUBLISHED : Monday, 27 November, 2017, 6:30pm
UPDATED : Monday, 27 November, 2017, 11:24pm

China’s securities regulator will suspend the approval of new mutual funds that are meant for investing in Hong Kong’s equity market, putting a temporary cap on southbound capital that has boosted the city’s benchmark stock index to a decade high.

Chinese mutual funds which plan to allocate more than 80 per cent of their portfolio to Hong Kong-listed equities will no longer be approved for sale on the mainland, according to two state-owned funds familiar with the matter, citing an order by the China Securities Regulatory Commission. Only funds that allocate less than half of their portfolio to Hong Kong will be approved, the funds said, echoing a Monday report on the China Fund website, an industry news site.

The Chinese regulator ‘s latest instruction reflects the concern that Hong Kong’s key stock benchmark has risen too much too quickly to a level that was last attained in 2007, before the global financial crisis a year later caused the Hang Seng Index to plunge 33 per cent, and wiped out billions of dollars of value.

‘Fund of funds’ seen as the saviours of China’s mutual fund sector

Before this year, Hong Kong’s stock market was Asia’s cheapest in price-earnings terms, trading on average at less than 12 times historical earnings. With the introduction of the so-called Connect schemes -- whereby the stock markets of Shenzhen and Shanghai were linked to Hong Kong, allowing investors to trade in all three markets -- southbound funds from mainland China had been flooding into the city’s bourse in search of bargains.

Investments of Hong Kong stocks by mainland Chinese funds ballooned to HK$808.8 billion (US$103.6 billion) as at October 31, a 60-fold increase compared with 2014 before the first of the two Connect schemes was introduced, according to the Hong Kong Stock Exchange’s data.

The Hang Seng Index has risen almost 38 per cent this year to a decade high of 30,003.49 on November 22 , advancing 4.4 per cent in the past month alone to become the world’s 10th-biggest gainer among 96 indexes tracked by Bloomberg. Among major indexes, it was the second biggest winner, behind only the 4.7 per cent gain in the Nikkei 225.

That is raising concerns among Chinese policymakers that any correction in Hong Kong would trap Chinese investors, particularly since the city’s market lacks the kind of 10 per cent limit down circuit breaker found in Shanghai and Shenzhen to limit single-day losses.