The money is flowing through the Stock Connect program, a trading link between Hong Kong and exchanges in Shanghai and Shenzhen. Analysts and investors said mainland investors would likely become more influential in Hong Kong.
Gary Zhang, a partner at Shenzhen Grand Gold Capital Co., said the rush of capital “isn’t just hot money but an ongoing trend.”
As of Wednesday, net buying from the mainland this month had already hit the equivalent of $26.5 billion, beating the previous full monthly record by more than 47%, according to Wind. On Tuesday, total turnover on the stock exchange hit a daily record, at the equivalent of $39 billion, with so-called southbound turnover also at its highest ever.
Many mainland asset managers can have up to 50% of a fund invested in Hong Kong stocks, Mr. Zhang said. He said some were drawn by the city’s relatively cheap valuations and the chance to invest in beaten-down market heavyweights, anticipating those stocks will fare better if U.S.-China relations improve.
The relative calm in Hong Kong since China’s imposition of a national-security law last year was another draw for mainland investors, he added.
On Wednesday, the city’s benchmark Hang Seng Index rose 1.1% to hit its highest since May 2019. Still, it has lagged behind other Chinese benchmarks such as the Shanghai Composite, which has returned to highs last reached in 2015.
As of Tuesday, the Hang Seng traded at a price of 12.7 times expected earnings, according to Refinitiv. That compares with a 19.6 times multiple for the CSI 300, a gauge of the biggest mainland stocks.
Investors say a boom in China’s fund-management industry has underpinned the inflows. More than 1,400 new mutual funds were launched in China last year, raising a total of 3.16 trillion yuan, according to Morningstar. That is the equivalent of $488 billion, and more than double the 2019 figure.
“The rise of mutual-funds investment in China is viewed as a very big driver of this southbound fund flow,” said Frank Li, managing director of China Asset Management (Hong Kong) Ltd., the local arm of a top Chinese fund manager. Investors are reallocating money from bank accounts and wealth-management products into mutual funds, he said.
Jason Lui, head of equity and derivatives strategy for Asia Pacific at BNP Paribas, said Chinese institutional investors were looking at long-term investments in large Hong Kong-listed stocks that had high dividend yields.
In contrast, individual investors dabbling in the Hong Kong market were seeking short-term trading opportunities in sectors that had benefited from the pandemic, such as technology and health-care stocks, many of which are listed only in Hong Kong.
“Mainland investors will continue to allocate more funds into the Hong Kong market, thanks to the combination of relatively cheap valuations and investment opportunities in many new issuances, as more Chinese tech startups and U.S.-listed Chinese companies opt for a Hong Kong listing,” he said.
Southbound buying has helped narrow a longstanding premium that onshore shares carry versus equivalent stocks in Hong Kong. The Hang Seng Stock Connect China AH Premium Index shows this gap has fallen to about 33%, from a recent peak of nearly 50% in October.
Tham Mun Hon, head of Greater China research at UOB Kay Hian in Hong Kong, said recent buying was focused on laggards such as property developers, property-management firms, banks and insurers. He expects fund flows to weaken as the premium narrows further to about 20% to 25%.
Write to Joanne Chiu at [email protected] and Chong Koh Ping at [email protected]
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Appeared in the January 21, 2021, print edition as ‘Hong Kong Shares Draw Flood of Chinese Cash.’
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