QE3, China Revival Spur Longest Hong Kong Rally Since ’05

The broadest gauge of equity prices in Hong Kong is posting its longest streak of gains in seven years, pushed higher by speculation China’s economy will rebound as central banks hold down interest rates.

The Hang Seng Composite Index yesterday climbed for an 11th day (HSCI), the most since July 2005, according to data compiled by Bloomberg. The Hang Seng Index, the city’s benchmark gauge, rose 0.2 percent today, capping its longest streak since 2006. Shares have rallied since the U.S. Federal Reserve announced a third program of asset purchases on Sept. 13. Hong Kong’s de facto central bank intervened for the first time since 2009 to defend the city’s currency peg to the U.S. dollar as money pours in.

Hong Kong is the only venue in China where foreigners can freely buy and sell shares of the country’s biggest companies. Chinese factory output and retail sales accelerated in September even as growth slowed for a seventh quarter, according to government data. Mainland companies made up 56 percent of the city’s market value at the end of September, bourse operator Hong Kong Exchanges & Clearing Ltd. said.

“The easy monetary policy in the U.S. combined with rising confidence that China’s economy might be turning the corner has helped boost sentiment in Hong Kong-traded Chinese shares,” said Shane Oliver, Sydney-based head of investment strategy at AMP Capital Investors Ltd., which has $100 billion in assets. “Hong Kong’s currency peg with the U.S. effectively means the city is running the same loose monetary policy as the U.S.”

$180 Billion

The rally has added almost $180 billion to the city’s market capitalization since Sept. 13, according to data compiled by Bloomberg. In the same period, U.S. equities have lost about $578 billion, the data show. Hong Kong, home to 7.21 million people, is the world’s fourth-largest equity market and is less than 5 percent from overtaking the U.K. for third place.

Hong Kong has no taxes on capital gains or dividends and doesn’t restrict capital flows. The currency has been pegged to the U.S. dollar since 1983, and since 2005 has been allowed to trade between HK$7.75 and HK$7.85. The peg limits foreign exchange risk for equity traders using dollars.

Stocks in the Hang Seng Index (HSI), the city’s 49-member benchmark gauge, yield 2.75 percent on average, according to data compiled by Bloomberg. That compares with 2.05 percent for companies in the Standard & Poor’s 500 Index. The Hang Seng Index trades for 11.5 times estimated earnings compared with 13.5 times for the S&P 500.

‘Hot Money’

“There is some hot money coming into Hong Kong on expectation there will be a bottoming out of China’s economy,” said Linus Yip, chief strategist at First Shanghai Securities in Hong Kong. “We expect there will be at least a certain amount of that going into the Hong Kong stock market, and it will help market sentiment.”

The former British colony’s share market has been rallying since the Fed committed to buying an additional $40 billion of mortgage-backed securities a month until it sees a substantial improvement in the U.S. labor market. The third round of so- called quantitative easing has coincided with signs that China’s efforts to engineer a soft-landing are bearing fruit.

The Hang Seng China Enterprises Index (HSCEI), of mainland companies listed in Hong Kong, has risen 12 percent since Sept. 13, more than any major index in the world’s 40-biggest markets, according to data compiled by Bloomberg.

A preliminary purchasing managers’ index reading yesterday rose to 49.1 after a final reading of 47.9 in September, HSBC Holdings Plc and Markit Economics said. A level of 50 indicates expansion. Industrial production, fixed asset investment and retail sales all expanded at a faster-than-estimated rate in September, according to reports released last week.

‘Bottoming Out’

“China’s growth is bottoming out, thanks to the effects of earlier easing measures,” said HSBC economists Junwei Sun and Hongbin Qu. “Infrastructure-led investment growth is offsetting the weakness in other sectors, becoming the key driver for the rebound of investment growth.”

Weichai Power Co., a diesel-engine maker, and Zoomlion Heavy Industry Science & Technology Co., a crane maker, gained the most among members of the Hang Seng China Enterprises Index, rising 22 percent since QE3 was announced. Just three of the 40 members of the H-share index retreated in the period.

Increases among Chinese banks have propelled a measure of financial stocks to the best advance among the Hang Seng Index’s four industries. Industrial & Commercial Bank of China Ltd., the world’s largest lender by market value, has risen 20 percent. China Construction Bank Co. is up 15 percent. A gauge of financial shares in the MSCI All-Country World Index (MXWD0FN) rose 0.3 percent from Sept. 13 through Oct. 23.

2009 Rally

“There’s some increase in risk appetite back to China,” said Alex Au, managing director of Richland Capital Management Ltd. in Hong Kong, which oversees over $200 million. “If you look at the history of hot money flowing in, like in 2009, the stock market rallied for few months. We should continue to see investors increasing their weighting in this market.”

The Hang Seng Composite Index rallied 87 percent from March 9, 2009, when global equity markets bottomed after the crash of Lehman Brothers Holdings Inc., through the end of that year. The gauge slipped 0.1 percent to 2,944.51 today, its first decline since Oct. 8.

China’s ruling Communist Party will execute a once-a-decade leadership transition next month. Vice President Xi Jinping is forecast to replace Hu Jintao as party general secretary and president next year.

A Shares

Growth in the world’s second-largest economy will probably accelerate during the next few quarters, Morgan Stanley strategists including Hong Kong-based Jonathan Garner wrote in a report yesterday. The rebound will probably surprise investors who have become “increasingly cautious” on China, they wrote.

Hong Kong-listed shares of Chinese companies outperformed their mainland counterparts for a record 10 straight days through Oct. 23. Yuan-denominated A shares traded at the biggest discount to H shares since June 2011 on Oct. 23, according to an index compiled by Hang Seng Bank Ltd. The amount of A shares that foreign investors can trade is limited by quotas and restrictions on yuan convertability.

China Rongsheng Heavy Industries Group Holdings Ltd., the country’s biggest privately owned shipbuilder, has gained 52 percent in Hong Kong since Sept. 13, the largest advance on the Hang Seng Composite Index. Kingboard Chemical Holdings Ltd. (148) advanced 41 percent.

Industrial-machinery maker Lonking Holdings Ltd., China National Building Materials Co., which provides cement-making equipment, and lead-acid battery maker Leoch International Technology Ltd. all climbed more than 30 percent.

Targets Cut

Of the 355 stocks in the Hang Seng Composite Index, 314 advanced from Sept. 13 through yesterday.

Those banking on a rapid return to high rates of growth in China may be disappointed as the government struggles to keep a lid on property prices while encouraging the growth of the domestic economy. China this year lowered its official growth target to 7.5 percent in pursuit of more sustainable expansion, Premier Wen Jiabao said in March.

“There’s been a lot of expectations that post the leadership transition there’s going to be a lot of fiscal stimulus,” said Lee King Fuei, a Singapore-based fund manager at Schroders Plc that oversees $300 billion. “It’s still too early to tell whether the stimulus would actually follow immediately after the change in leadership. There’s a risk that the market may be disappointed there.”

‘Positive Changes’

Growth is stabilizing and the economy will continue to show “positive changes,” Wen said Oct. 17, according to the official Xinhua News Agency. China is confident of achieving economic and social development targets for the year, Xinhua said yesterday, citing an unidentified National Development and Reform Commission official.

The central bank will probably keep the benchmark one-year lending rate at 6 percent through the end of 2012, based on median estimates in a survey conducted between Oct. 18 and Oct. 22, instead of prior forecasts for a quarter percentage-point reduction. China may lower the reserve ratio for major banks by a half point this year, the survey showed, compared with the full point projected in September.

“Chinese stocks will be the main target,” of fund inflows to Hong Kong, said First Shanghai’s Yip. “There will be more to come.”

To contact the reporters on this story: Kana Nishizawa in Hong Kong at knishizawa5@bloomberg.net; Jonathan Burgos in Singapore at jburgos4@bloomberg.net

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

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