Hang Seng turns a brighter shade of
red By Olivia Chung
HONG KONG - There are signs that the Hong
Kong stock market is becoming increasingly
Sinicized.
As Hong Kong's benchmark Hang
Seng Index keeps setting record highs, foreign
institutional investors are reducing their
holdings in Hong Kong-listed mainland Chinese
firms, thinking they are overvalued.
In
the past, any significant selling by foreign
institutional investors
would
cause share prices to dive and hence drive the
market down. This time, however, it's quite the
opposite. Share prices of giant Hong Kong-listed
China firms dumped by international investors have
quickly rebounded as mainland investors splurge on
the shares.
As a result, analysts say
mainland Chinese investors are gradually replacing
foreign investors and becoming increasingly
important players on the Hong Kong stock market.
And as such, the Hong Kong market is becoming
increasingly connected with the mainland markets,
and less vulnerable to fluctuations in
international markets.
Temasek Holdings
Pte, the investment arm of the Singaporean
government, recently raised HK$809.6 million by
selling 37 million shares in China Cosco Holdings,
the largest shipping conglomerate in China,
according to recent filings with the Hong Kong
stock exchange.
The sales enabled Temasek
to pocket about HK$650 million in profit based on
the HK$4.25 per share it paid during Cosco's
initial public offering in June 2005.
Temasek's disposal was the most recent in
a string of sales of shares traded in Hong Kong by
international investors seeking to cash out from
the rapid price hikes in China's biggest
companies.
China Cosco shares have gained
about 360% so far this year mainly on the success
of its bulk-shipping acquisitions, outpacing a 33%
rise in the benchmark Hang Seng Index.
Earlier, US-based strategic investor Alcoa
joined American billionaire Warren Buffett in
selling down holdings in Hong Kong-listed Chinese
companies.
Alcoa International (Asia) Ltd,
a wholly owned subsidiary of Alcoa, sold its
entire holding in Aluminum Corp of China Ltd
(Chalco) for about HK$15.3 billion at HK$17.34 per
share. Alcoa had been a big investor in Chalco
since its initial public offering in 2001, holding
about 7% of its shares.
Buffet's listed
flagship Berkshire Hathaway cut its stake in
PetroChina, the mainland's largest oil producer,
to 1.05% from 1.29% in the past two months for
HK$1.59 billion.
Shares of PetroChina
surged by about 25% 18 days after Buffet's latest
sale of his holding in the oil giant, while Cosco
rebounded 1.5% a day after it tumbled on Alcoa's
sale of its shares in Chalco.
Analysts
said investors in the Cosco stake were primarily
China-invested securities firms such as Bank of
China International, while sellers were foreign
invested securities houses such as HSBC Brokering
and UBS Investment Bank.
Analysts said the
mainland investors have different a investment
rationale than international investors.
Grace Liu, an analyst with Guotai Jun'an
Securities Hong Kong, said it made sense for
Buffett to sell his shares.
"The share
price of PetroChina had grown by six times from
more than four years ago when Mr Buffett bought
the shares. Besides, PetroChina's H shares'
price-earnings ratio outstripping peers, so it's
sensible from his point of view for Mr Buffett to
sell the shares," she said.
Based on
Friday's close, PetroChina trades at 16.86 times
this year's estimated earnings, compared with 13.6
times for ExxonMobil Corp and 10.7 times for Royal
Dutch/Shell.
Another analyst at a Hong
Kong private equity fund who asked for anonymity
said while international investors such as Buffett
usually judge a stock's value by comparing its
price-to-earnings multiple with its peer group
overseas and sell when they regard it as
overvalued, mainland investors who are more
familiar with with China's economic development
chase such stocks based on whether they are a
"dragon's head" of an industry.
Analysts
said they expect the investment structure of Hong
Kong stock market will continue to change
gradually as more mainland funds flow into it,
despite the international funds cashing out.
Hong Kong's benchmark index has rallied
33% since mainland announced the "through train"
or "fund from the north" plan allowing individual
mainland investors to invest in Hong Kong equity
as of August 20. It's estimated that the plan will
bring US$150 billion to the Hong Kong market in
the next three years, or about 7% of the current
market capitalization, said Thomas Deng, a Goldman
Sachs economist.
Another plan, the
qualified domestic institutional investor (QDII)
plan, also became more popular after regulators
widened the scope of mainland investments to
include overseas stock markets.
Twenty-two
banks have been granted licenses to invest up to
US$16.1 billion abroad on behalf of mainland
clients, and 14 of those have launched more than
30 QDII products.
A spokesman of Taifook
Securities Group said that to serve mainland
customers, the company is busy writing a book of
Hong Kong-listed China firms for mainland
investors sending its staff to cities such as
Guangzhou, Shenzhen, Chengdu and Shanghai to give
talks.
"As local firms are not allowed to
sell products on the mainland, we have been
holding seminars in a bid to promote our brand
name in a low profile," he said.
Despite
the restriction on mainlanders buying overseas
shares, many mainland visitors have quietly opened
accounts with Hong Kong securities houses. An
official with a local brokerage house said about
2,000 new accounts were opened in his company
respectively in April and May, with 30% of them
opened by mainland investors, thanks to the May
Day "golden week" national holiday.
The
Taifook official said he expects more mainlanders
to come to the territory to open investment
accounts during this golden week, a seven-day
holiday on the mainland in recognition of National
Day (there are three golden weeks in China; the
third marks the lunar new year in January or
February). From June to September, more than 1,000
new accounts were opened each month.
Liu
said mainland customers generally favor mainland
companies that are listed in Hong Kong. They are
known as H shares in Hong Kong and A shares on the
mainland.
Joseph Tung, executive director
of the Hong Kong Travel Industry Council, said
there are travel agencies organizing tours during
golden week to open H-share accounts in Hong Kong
for potential mainland investors.
However,
an analyst who asked not to be named said mainland
funds has been flowing into Hong Kong for a long
time.
Apart from the outflow of funds from
China, the analyst attributed the record high of
the Hang Seng Index to funds funneled by Europe
and the Middle East, which are avoiding escalating
risks from the subprime crisis in the United
States and attracted by China's strong economic
growth.
"The overseas funds have been
rushing to Hong Kong to take advantage of the
lower valuations of H-shares, too," she said.
Olivia Chung is a senior Asia
Times Online reporter.
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Asia Times Online Ltd. All rights reserved. Please
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