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China market turmoil sees southbound trading on stock connect pick up

China market turmoil sees southbound trading on stock connect pick up

Originally published at the South China Morning Post on January 29, 2016.

Mainland investors have recently swooped up Hong Kong shares at an unprecedented rate through the Shanghai-Hong Kong Stock Connect scheme.

The link allows mainland China investors to buy Hong Kong H shares and international investors to buy yuan-denominated A shares on the mainland, but since its launch in November 2014 there has been more money flowing into the mainland that out. Yet recent market volatility has seen more mainland investors buying Hong Kong shares than vice versa.

“Most of the investors in China, they’re afraid of the depreciation of the RMB. So although the market is not very good, they want to change their portfolio,” Hong Kong Securities Association chairman Benny Mau Ying-yuen said. “I think it’s a continued trend, (but you may not) see a huge amount of money outflow from China to Hong Kong.”

Southbound trading from mainland investors buying Hong Kong shares has exceeded that of northbound trading of mainland China shares by global investors twice this month. The daily turnover of southbound trading rallied to HK$3.21 billion, about HK$800 million more than northbound, on January 21 and to HK$2.29 billion, about HK$118 million more, on Monday.

Analysts attribute the unusual spikes to pessimism towards the mainland market, the depreciating yuan and the volatility of the A-share market. Investors from the mainland are looking to move money abroad as the currency continues to decline, and global investors are preferring to stay on the sidelines while China’s economic outlook remains uncertain.

“It’s reflecting the mainland (investors) becoming more interested in foreign currency assets,” said Ben Kwong Man-bun, director of KGI Asia. “I think it’s very much a natural flow of money ... funds are looking for opportunity, for a safe place to park their money.”

He said investors favoured Hong Kong stocks with more international exposure like HSBC and AIA.

“The Hong Kong stock market is already down quite a lot,” Kwong said. “In terms of the valuation, Hong Kong shares are much cheaper. Of course, we will have to see whether this trend will continue.”

Mainland markets began the year with dramatic plunges and a rapid decline in the yuan. At a global conference in Davos, Switzerland, last week, China Securities Regulatory Commission vice-chairman Fang Xinghai said investors should get used to China’s stock market and the high volatility of A shares. The central government recently released economic data showing the slowest growth rate in 25 years, casting a gloomy outlook for investors even as Beijing struggles to fix structural problems.

Ivan Li, an equities analyst at Tung Shing Securities, said China’s recent run of rash decisions, including suspending its new stock market circuit-breaker system, designed to halt price plunges, and suddenly devaluing its currency were causing foreigners to become wary about purchasing A shares.

“I think there’s true concern on the China economy,” Li said. “Even the normal investors would like to get out of the A-share market.”

He said he expected the trend to continue for one or two months.

“(Mainland investors) are more interested in sectors that are less traditional, more related to the new economy era, for example Tencent,” he said. “There are not really a lot of sectors that look interesting (in the A-share market).”

The stock connect scheme was established with the intention of providing a network for global investors to invest in mainland China stocks. Mainland investors in the A-share market tend to be retail investors while the H-share market largely consists of institutional investors, who do not react as dramatically to shifts in the market.

Brett McGonegal, co-chief executive of Reorient, likens the spikes to trading irregularities that naturally occur when markets hit bottom. He said they do not show a trend or negative fundamental shifts, but rather a period of bargain hunting since the price spread between A shares and H shares is high due to regulatory differences between the markets.

On average, the two types of shares were trading at similar prices before the launch of the stock connect scheme.

“There’s a huge negative vibe towards China right now and people are looking at ways they can hedge bets,” McGonegal said. “I think that’s what you’re seeing right now.”

He said he did not see the two markets reaching parity anytime soon.

“If you look at the markets today, there’s definitely people selling A shares,” he said. “People have some liquidity concerns.”

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