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Mainland Chinese Investors Pivot to Safer Hong Kong Stocks
Shares of major Chinese banks listed in Hong Kong get boost
By ANJIE ZHENG
Aug. 31, 2016 2:37 a.m. ET
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HONG KONG—Chinese investors are plowing money into well-known Hong Kong-listed stocks as they join the global hunt for yield and safe assets, a trend that points to a change in investing tastes on the mainland.
The surge of mainland money has helped boost the share prices of the major Chinese banks listed in Hong Kong, such as Industrial and Commercial Bank of China Ltd., the world’s biggest bank by assets, and China Construction Bank Corp., both of which are among the top gainers in the benchmark Hang Seng Index this year. Chinese investors have also piled into blue-chip companies such as global bank HSBC Holdings PLC and tech giant Tencent Holdings Ltd. this year, the two biggest components of the index.
Mainland Chinese investors, who can access the Hong Kong market via a trading link with the Shanghai exchange, have in the past preferred investing in smaller companies that had high growth potential but carried plenty of risk. A favorite name before its trading halt last year was highflying Hanergy Thin Film Group Ltd., whose share price surged 6.6 times in one year before plunging 47% in May 2015.
This year, amid relatively subdued markets—the Hang Seng is up 5% in 2016—Chinese investors have swung toward companies that may have less exciting prospects but at least pay a decent dividend. ICBC, for example, yields around 5.6%, while HSBC yields 7.7%. That compares with an average dividend yield for Hang Seng Index stocks of 3.5% and 2.1% for Shanghai Composite shares.
“Chinese investors last year bought small-caps because they were chasing capital gains since the market was rallying strongly,” said Edmond Law, an analyst at UOB Kay Hian Research. “This year, because the market isn’t performing as strongly, they are chasing yield.”
Bi-weekly data on the most popular stocks for Chinese funds buying Hong Kong shares via Shanghai bear out the trend. ICBC’s Hong Kong shares, for example, have been among the 10 most-traded stocks during 12 two-week periods out of 15 this year, helping push its share price up 10.6% this year. Over the same period last year, it was a top-traded stock just once.
One attraction for mainland investors is that shares of dual-listed Chinese companies, particularly banks, are often cheaper in Hong Kong, where they are known as H-shares, than in Shanghai, where they are called A-shares. ICBC trades at a 5.1% discount in Hong Kong, for example, while other banks such as China Construction Bank Corp. and Agricultural Bank of China Ltd. trade at 4.9% and 16.8% discounts, respectively.
The difference makes it cheaper for investors to receive the same dividend payout in Hong Kong—an increasingly important consideration for mainland investors, according to Qi Wang, chief executive at MegaTrust Investments, a mainland-based fund manager.
The shift into high-dividend stocks is "not a temporary market change like picking different sectors every month,” Mr. Wang said. “It’s a long-term secular change.”
“Very few A-shares pay dividends. So investors are desperately seeking higher yield. This is something we’re seeing in both A- and H-share markets,” he said.
There is little clear data on what type of mainland investors are leading the charge into major Hong Kong-listed stocks. However, the trend appears to be driven in part by large institutional investors such as insurance and pension funds since Chinese retail investors are still less focused on high-yield stocks, according to Jian Shi Cortesi, China fund manager at GAM Holding AG, which manages 115.49 billion dollars globally.
Chinese investors’ hunt for yield has helped so-called southbound investment flows from Shanghai to Hong Kong via the Stock Connect system to outweigh those going in the other direction this year. Analysts expect that more money could start to flow from the mainland into Hong Kong later this year, when a new trading link with the Shenzhen Stock Exchange is opened.
For sure, Chinese investors have other reasons to invest in Hong Kong. Often it is the only place they can buy shares in major Chinese brands that don’t have a listing at home, such as Tencent, electric-vehicle maker Geely Automobile Holdings Ltd., telecom giant China Mobile Ltd. and casino operator Sands China Ltd.
Some Chinese investors have also looked to invest in Hong Kong to act as a defense against currency depreciation. The Chinese yuan has dropped 7% in the past year against the U.S. dollar. The Hong Kong dollar is pegged to the greenback, so putting money into relatively safer Hong Kong-listed stocks has become a way for Chinese investors to benefit.
“High-yielding bank stocks are being used as a proxy against the weakening yuan,” said Wendy Liu, equity strategist at Nomura Holdings Inc.
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