China’s ETF Plan Boosts Hong Kong Financials Amid Biggest Drop Since 2008

China’s Vice Premier Li Keqiang unveiled plans yesterday to allow more cross-border investments, boosting Hong Kong financial shares that are poised for the biggest losses since the 2008 credit crisis.

Guotai Junan International Holdings Ltd. (1788), a securities brokerage, and China Everbright Ltd. (165), which provides investment- banking services, surged more than 8 percent in Hong Kong trading yesterday, leading gains in a measure of financial companies in the Hang Seng Composite Index. Bank of East Asia increased the most in a year, while Dah Sing Financial Holdings Ltd. (440) posted the largest advance since April. All four stocks extended their gains today.

The proposals further relax limits on investment flows, bolstering Hong Kong’s role as a financial hub. China will start an exchange-traded fund linked to Hong Kong equities, commit a 20 billion yuan ($3.1 billion) quota for qualified companies to invest in domestic Chinese securities and expand sales of yuan bonds in the city, Li said at a forum yesterday.

“This is a boost to sentiment to investors in brokerage companies,” said Agnes Deng, the Hong Kong-based head of Hong Kong and China equities for Baring Asset Management, which oversees $52 billion, in a telephone interview. “But in the near term, it’s hard to quantify what’s the impact on earnings or revenue. There are a lot of other things that probably need to be smoothed out.”

Too Little, Too Late

China’s government places quotas on foreign ownership of securities listed in the country and also on the amount domestic fund managers are allowed to invest offshore. The government limits inflows to curb gains in the yuan, which rose 3.2 percent against the dollar this year.

“This is a late decision,” said Ronald Wan, managing director at China Merchants Securities (Hong Kong) Co., part of the nation’s sixth-biggest brokerage. “China government should increase the size of the program because it’s too small. It definitely can’t satisfy demand.”

Deposits of the Chinese currency in Hong Kong totaled a record 554 billion yuan at the end of June, more than six times the level of a year earlier, according to the city’s de facto central bank. A 15 billion-yuan sale of yuan-denominated bonds by China’s finance ministry in Hong Kong this week was its largest issue of “dim sum bonds” in the city, drawing 69 billion yuan of orders.

Bad Loans

While the Hang Seng Composite Financial Index of banks, brokerages and insurers advanced in the past two days, it has lost 14 percent this year, on track for its biggest slide since 2008’s 43 percent tumble. China, the world’s second-largest economy, has tightened lending requirements, introduced property curbs and raised interest rates to tame inflation that accelerated to a three-year high in July.

The financial index, which reached the lowest level since March 2009 last week, has also fallen amid increased concern of bad loans at Chinese lenders. China’s first audit of local government debt found liabilities of 10.7 trillion yuan at the end of last year and warned of repayment risks, including a reliance on land sales, according to a report from the National Audit Office on June 27.

Hong Kong Exchanges & Clearing Ltd., the world’s biggest bourse operator by market value, said today that it’s in joint- venture talks with China’s stock exchanges about developing indexes and equity derivatives. No binding agreement has been reached, the Hong Kong bourse said.

Through Train

China will expand its companies’ offshore bond sales and support the use of yuan for foreign direct investment in the nation, Li, the front-runner to replace Wen Jiabao as premier in 2013 said yesterday. The city’s status as a financial center “is crucial for Hong Kong’s development,” he said.

The pledge for an exchange-traded fund comes after the government scrapped a plan in January 2010 to let Chinese nationals buy equities directly. The so-called “through-train” program for direct purchases, unveiled by regulators in August 2007, had helped push the Hang Seng Index to a record high in October that year.

“The probability of the measures happening is hard to tell because details have not been announced yet,” said Yoji Takeda, the Hong Kong-based head of the Asian equity management team at RBC Investment (Asia) Ltd., which oversees $1.2 billion. “Banks in Hong Kong may get some benefits because there will be more yuan business.”

Dim Sum

Guotai Junan climbed 3.1 percent to HK$2.97 as of 12:27 p.m. in Hong Kong, extending yesterday’s 9.9 percent surge. The stock is set for its highest close since Aug. 2. China Everbright gained 1.5 percent to HK$12.38, after yesterday’s 8.2 percent surge. Both stocks lost almost 30 percent in 2011.

Dah Sing Financial rose 5.9 percent to HK$31.30, adding to yesterday’s 3.3 percent increase. Bank of East Asia advanced 0.8 percent to HK$30.10, paring its drop this year to 7.5 percent. It climbed 4 percent yesterday.

“As China’s capital market isn’t completely open, there will be certain criteria to control the flow of funds into the country,” said Andrew Fung, head of treasury and investment at Hang Seng Bank Ltd. in Hong Kong. The comments made yesterday were “just high-level conceptual talk,” he said.

To contact the reporters on this story: Lynn Thomasson in Hong Kong at lthomasson@bloomberg.net; Kana Nishizawa in Hong Kong at knishizawa5@bloomberg.net; Stephanie Tong in Hong Kong at stong17@bloomberg.net.

To contact the editor responsible for this story: Nick Gentle at ngentle2@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.