Caixin
Jan 20, 2021 05:49 AM
FINANCE

Chinese Mainland Cash Floods Into Hong Kong Stock Market

Since the Shanghai-Hong Kong Stock Connect program started in November 2014, net southbound flows topped HK$10 billion ($1.3 billion) on only 19 days, 12 of them this month.
Since the Shanghai-Hong Kong Stock Connect program started in November 2014, net southbound flows topped HK$10 billion ($1.3 billion) on only 19 days, 12 of them this month.

The Hong Kong stock market started strongly this year after lagging behind major global markets in 2020, boosted by record southbound flows through the Shanghai- and Shenzhen-Hong Kong connect programs.

The benchmark Hang Seng Index rose 2.7% Tuesday, closing at 29642.28, close to the record high of 30000 in April 2019. The index jumped 8.9% so far this month, marking its best start to a year in 36 years and the second-best among major global markets, behind the 16.87% gain of the Vietnam VN 30 index.

Daily market turnover surged to a record HK$301.6 billion ($38.9 billion), the first time above HK$300 billion and the highest in Hong Kong’s stock market history. Short-selling volume on Hong Kong’s main board approached 17% of turnover for two consecutive days.

Among the 52 constituents of the Hang Seng Index, only three declined and one was unchanged. China Mengniu Dairy Co. Ltd. dropped 1.13%; China Unicom fell 0.39%; and Tencent Holdings Ltd. was down 0.3%. Zhejiang Geely Holding Group Co. Ltd., the Chinese owner of Volvo, closed flat.

Property developer China Resources Land, sportswear maker Anta Sports Products and Sunny Optical Technology surged at least 7.9% to lead the rally. Twenty-seven stocks climbed more than 2%, and 21 rose more than 3%.

Net inflows into Hong Kong stocks through the Shanghai and Shenzhen southbound connect programs reached a record high of HK$26.6 billion Tuesday. For two consecutive days, mainland investors poured a net of more than HK$20 billion into the city.

Since the introduction of the Shanghai-Hong Kong Stock Connect program in November 2014, net southbound flows exceeded HK$10 billion on only 19 days, 12 of them this month.

The U.S. sanctions haven’t affected the fundamentals of some big Chinese companies, and the correction in the Hong Kong stock market has made individual stocks’ valuations more attractive, prompting bargain-hunting, especially by Chinese mainland investors, said Carie Li Ruofan, economist of OCBC Wing Hang Bank.

The appreciation of the yuan and the decline in geopolitical risk have also prompted mainland funds to seek investment opportunities in Hong Kong, said Bruce Pang Ming, head of Macro and Strategic Research at China Renaissance Securities (Hong Kong).

The Hang Seng Index declined on only two days in the 12 trading sessions in January. Tuesday’s 2.7% jump was also the biggest daily rally in about six months. In 2020, the Hong Kong stock market dropped 3.4%, compared with a 27% gain in China’s A share market and a 16% gain in the S&P 500 Index.

The constituent stocks of the Hang Seng Index are still dominated by traditional industries. The financial, real estate, energy and telecommunications sectors didn’t perform well in 2020, dragging the index lower.

At the start of this year, despite the enthusiasm from mainland investors, global investors are withdrawing from Chinese stocks, mainly due to U.S. sanctions.

As of Jan. 13, global investors had a net outflow of $3.491 billion from allocations to Chinese companies listed globally, according to Bank of America Merrill Lynch.

Vanguard Group said it liquidated its holdings of U.S.-sanctioned Chinese companies as of Jan. 8, complying with a November executive order by U.S. President Donald Trump.

From the beginning of 2019 to the end of 2020, global funds had an overallotment to the Hong Kong stock market, but with long-term U.S. Treasury bond yields rising in early 2021, some global funds have been increasing allotments to U.S. stocks and therefore may consider temporarily withdrawing from emerging markets, said Pang at China Renaissance Securities.

Esty Dwek, the head of global market strategy at Natixis Investment Managers, said she continues to be bullish on Asia, especially China. But she pointed out that the market might be overly optimistic on China-U.S. relations under the Biden administration. The structural trend of tensions won’t change in the short term, though the market is facing less uncertainty, she said.

Contact reporter Denise Jia (huijuanjia@caixin.com) and editor Bob Simison (bobsimison@caixin.com).

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