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Mainland China’s Flow of Money to Hong Kong Stocks Dries Up
After a steep rally, mainland traders are less keen to invest via a link connecting China to offshore equities
Updated Oct. 27, 2016 5:14 a.m. ET
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Chinese investors have taken a sudden aversion to the Hong Kong stock market.
The flood of money that has flowed south from Shanghai to Hong Kong via a trading link between the two stock exchanges has slumped this month, after a surge in the previous two months.
Net buying of Hong Kong-listed stocks by Chinese investors via the so-called Stock Connect has plunged to less than 4.3 billion HongKong dollars (554 million dollars) so far in October, a fraction of the record high 59 billion HongKong dollars inflow last month, data from the Hong Kong Exchange shows.
Traders and analysts say there’s no one factor behind the slump, but cite the following as possible reasons why mainlanders now have less of a yen for Hong Kong stocks.
Hong Kong Doesn’t Look So Cheap
Many Chinese companies, including major banks and oil companies, are listed both in Shanghai, where their so-called A-shares are traded, and Hong Kong, where investors buy and sell their so-called H-shares.
A-shares usually trade at a premium to H-shares, meaning mainland investors can typically pick up shares in, say, Bank of China more cheaply in Hong Kong.
Thanks to the recent run-up in Hong Kong shares, driven by the heavy southbound flows via Stock Connect over the summer, that premium has narrowed. Chinese firms that are listed both in mainland China and Hong Kong currently trade at a 21.4% premium, down from 41% at start of the year.
At least six stocks, including Ping An Insurance, China Petroleum & Chemical Corp. and Anhui Conch Cement are now trading at a discount on the mainland market compared with their Hong Kong listing.
Banks Don’t Look So Hot
The banking sector proved particularly popular among mainland investors over the summer, thanks largely to banks’ reputation as steady dividend payers. But they have fallen out of favor this month thanks in part to profit-taking, and some concern about their growing exposure to risky mortgage lending. In eight of the past 10 trading days this month, ICBC, the world’s largest lender by assets, saw significantly more sell than buy trades southbound via the Stock Connect. It, along with China Construction Bank, is among Hong Kong’s worst-performing stocks this month.
The feverish buying of bank stocks last month was in part motivated by optimism ahead of the initial public offering of the Postal Savings Bank of China, a financer of small- to medium-sized companies. It raised over 7.4 billion dollars in the world’s largest IPO in two years when it listed in late September. Since the stabilization period ended on October 20, however, shares in the bank have taken an 8.4% dive.
“Now that the Postal Bank IPO is over, U.S. elections are around the corner and we head into reporting season, investors are more included to take a wait-and-see attitude in the near-term,” says Robert Levine, head of sales trading Asia at CLSA.
Others attribute the dwindling appetite for Hong Kong equities to Beijing’s surprisingly stern curbs on housing purchases. Chinese officials imposed restrictions on individuals looking to buy houses in more than 20 cities during the first week of October to cool off an overheating real estate market.
Some reckon that money that had been flowing into property is now headed into mainland stock markets, such as Shanghai’s.
“More funds are flowing back to the A-share market due to tightening rules in property investment, which [could] drive up the expected return on A-shares in the next three months,” said Yang Delong, chief economist at Shenzhen-based First Seafront Fund.
Shares in Shanghai have rallied more than 4% since October, began returning to a two-month high, while Hong Kong’s Hang Seng Index has only edged up 0.4% in the same period.
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