source from:WSJ
MARKETS
Chinese Investors Close In on Limits on Hong Kong Stocks
Mainland buyers help to briefly boost Hang Seng Index to a bull market

July 22, 2016 7:04 a.m. ET
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Chinese investors are rushing to get their money into the Hong Kong stock market and could be running out of time.


A surge in share buying from the mainland helped the Hang Seng Index briefly enter a bull market this past week, as the Hong Kong benchmark rose above 20% for the first time since February after a dismal start to the year.


But a program set up two years ago to enable Chinese investors to trade Hong Kong-listed shares is getting close to capacity. Under the Stock Connect trading system, investors in China can buy up to 10.5 billion yuan ($1.57 billion) in Hong Kong shares each day, with an aggregate limit of 250 billion yuan. The program has generated more buying than selling every day since April 22, pushing total investment past 80% of the limit. If the average rate of daily inflows since then is sustained, Chinese investors could exhaust the limit in less than two months, according to a Wall Street Journal analysis.


Several factors are boosting the popularity of the Hong Kong market: Worried by the yuan’s steady decline, Chinese investors have been looking to move money into other currencies. At the same time, Hong Kong shares are trading more cheaply than stocks on the mainland’s main markets in Shanghai and Shenzhen. Companies with a dual listing, such as major Chinese banks, often offer a higher dividend yield on their Hong Kong listings, also known as H-shares, than on mainland markets.


Chinese investors’ penchant for following a trend is another factor. “My friends were all chattering about buying H-shares, so I followed suit,” said Jackie Xu, a 35-year-old marketing manager in Shanghai. Ms. Xu has invested roughly 10% of her assets in an exchange-traded fund that tracks Hong Kong stocks since March. “My only regret is that I bought too few Hong Kong stocks,” she said.



Yield-hungry wealth managers and wealthy Chinese individuals also have boosted their allocations in Hong Kong shares in recent months through the so-called southbound Stock Connect, analysts said. Blue-chip stocks such as HSBC Holdings PLC and China Construction Bank Corp., have consistently topped the list of most-traded stocks via Stock Connect in recent months.




“One of the biggest supports in terms of flows for the Hong Kong equity market is through the southbound Stock Connect,” said Ben Luk, global market strategist at J.P. Morgan Asset Management.


Chinese investors’ buying through the program typically account for around 3% of daily trading in Hong Kong. In the past three months, that has surpassed 6%, according to data compiled by the Journal.


Mainland investors’ influence could rise further. Market regulators in Hong Kong and China have recently started discussions about raising the limits for Chinese investors putting money into Hong Kong, according to people familiar with the situation.


A Hong Kong Monetary Authority representative said “quotas may be adjusted” but declined to comment on whether talks with mainland regulators had begun.

When Stock Connect was launched in November 2014, many analysts assumed the program would be used mostly by global investors to buy Chinese stocks because it enabled foreign investors to buy shares listed in Shanghai more easily than ever before.


Instead, after an initial burst of enthusiasm for Chinese stocks, global investors got cold feet after markets there crashed last summer.


Money flowing into Hong Kong from mainland China surpassed that entering the Shanghai market through Stock Connect for the first time in January, with more than one-third of all Chinese purchases having taken place within the past three months. And as of July 21, just 47.3% of the 300 billion yuan limit for foreigners to buy mainland equities had been used.

Although Stock Connect enables Chinese investors to invest offshore, they can’t use the money to buy other assets in Hong Kong or elsewhere. Despite that, the chance to put some of their money into Hong Kong dollars is a key attraction for Chinese investors, whose assets are on average 95% yuan-denominated, Goldman Sachs estimates.


“Demand for diversifying renminbi exposures into offshore investments remains very high,” said Kinger Lau, chief China equity strategist at Goldman Sachs, using another name for the yuan.


And because Hong Kong stocks are relatively inexpensive, Chinese money could keep flowing in. Companies that have a dual listing trade at a 27.64% discount in Hong Kong compared with on the mainland, although that has narrowed from a 47% high earlier this year, according to the Hang Seng China AH Premium Index. Mainland shares tend to be more expensive in part because state-backed funds have been buying stocks there in recent months to help support the market.