a rising Hang Seng
The Hang Seng index is up by close to 10% over the past five trading days. The Hang Seng China Enterprises index, which measures the performance of stocks dually listed in Hong Kong and on the mainland, has risen by 13%+.
Both figures understate the performance of many individual issues in the Hong Kong market over that span. Hong Kong Exchanges and Clearing (HK: 0388), for example, is up by 40% over the past week. BYD (HK: 0285), the battery/electric car company, has risen by 30%; Air China (HK: 0753) is 40% higher.
The bulk of the money fueling these purchases is coming from the mainland, through the Stock Connect mechanism (see my post on SC) that Beijing established about half a year ago. The purpose of Stock Connect is to gradually allow larger flows of portfolio capital between Hong Kong and the mainland stock exchanges. The idea is that at some point the two areas will act effectively as one.
Up until the past few days, SC flows between Hong Kong and Shanghai have been disappointing. That changed drastically when Beijing gave the okay on March 27th for mainland mutual funds to use the SC mechanism. I don’t know whether it happened again overnight, but Chinese mutual funds have been forced to stop buying because the daily limit to Stock Connect transfers has been reached early in afternoon trading over each of the past several days.
What is causing the surge?
–sharp upward movement in mainland stock markets had left the Hong Kong shares of dually-listed Chinese companies trading at extremely deep discounts to their equivalent shares in China (shares in Hong Kong still average around 20% cheaper), and
–strict market regulation, properly audited financials and the existence of companies traded in Hong Kong but not available on the mainland all make Hong Kong an interesting destination for Chinese portfolio money.
As long as Hong Kong’s China-related shares trade at a steep discount to their Shanghai counterparts, arbitrage should be a support both for these individual issues and for the Hong Kong market as a whole.
For the first time ever, Hong Kong investors have got to keep a close eye on mainland exchange activity, since arbitrage can work both ways.
To the extent that any Hong Kong stocks are still about the physical place, Hong Kong, and not about the mainland, they’ll likely be significant laggards.
A tiny voice in the back of my head says that there’s something artificial about this week’s sharp rise. If this were 1980s Japan, I’d be convinced that mutual funds had been strongly urged by some government ministry to use Stock Connect vigorously this week. Could something like that have happened in China? Maybe. I think next week’s stock action will give us a hint as to whether the week’s exuberance is voluntary.
I have a lot of Hong Kong exposure already. I have no inclination to chase stocks solely on the idea I’ll surf a mega-wave of incoming money. Still, if this is genuine Chinese investor interest, I think we’re unlikely to see prices back at their week-ago levels any time soon. And we’re probably going to see pretty regular mainland support for Hong Kong shares. So I might be tempted to add on weakness.