Chinese traders flood into Hong Kong shares

April 7, 2016 1:21 PM (UTC+8)


Hong Kong looks like the favorite place for Chinese traders right now.

Hong Kong Stock Exchange traders
Hong Kong Stock Exchange traders

For the past 104 consecutive trading days, Chinese investors have been net buyers of the city’s shares, sinking 43.8 billion yuan ($6.8 billion) into equities from October through Tuesday, according to data compiled by Bloomberg tracking investments via the exchange link with Shanghai.

According to the data, during it first year in operation, the money flows through the link have been going in the opposite direction than expected. More money has flowed from China into Hong Kong than global asset managers have invested in Shanghai.

For the past few years, the Hong Kong shares have lagged their mainland counterparts, but now with the yuan’s declining value vs. the dollar, Chinese investors have piled into cheaper shares across the border.

“In China, there is talk of an asset drought — people don’t find domestic assets particularly attractive,” Tai Hui, the Hong Kong-based chief Asia market strategist at JPMorgan Asset Management told Bloomberg. “They are investing overseas in any way possible including via the southbound stock connect.”

Since last June, when the Chinese stock market went into a significant decline, buying mainland Chinese stocks has been a losing proposition. That trend continued into 2016, with the benchmark Shanghai Composite Index down 15% this year.

Even though Hong Kong’s Hang Seng Composite Index is down 8.1% this year, mainland investors continue to utilize part of their 10.5 billion yuan daily quota for link purchases as they have every day since Oct. 28. This is the longest streak since the mutual access program began in November 2014.

Part of the issue is that dual-listed shares are 38% more expensive on the mainland, according to the Hang Seng China AH Premium index, which rose to a six-week high on Tuesday.

The valuation gap has been a catalyst for Chinese investors to buy Hong Kong stocks, and they’re also seeking a hedge against a weaker yuan, Mark Jolley, equity strategist at CCB International Securities in Hong Kong told Bloomberg

“Yuan depreciation is the main reason,” Daniel So, strategist at CMB International Securities in Hong Kong told Bloomberg. “If they simply want to avoid yuan depreciation, they should buy stocks with little mainland business such as HSBC or pure Hong Kong local plays. But it seems many of the actively traded stocks by southbound money are mainland companies.”