The Shanghai-to-Hong Kong price convergence trade has never been more popular with stock investors.
Purchases of Hong Kong shares through the city’s mainland exchange link filled the 10.5 billion yuan ($1.7 billion) quota for the first time Wednesday, helping push turnover to a record and driving benchmark stock gauges to the biggest gains since 2011. Foreign investors sold the most mainland equities through the cross-border trading program since it began in November.
As the Shanghai Composite Index’s world-beating stock rally sends valuations to an almost five-year high, Chinese shares listed in Hong Kong have lagged behind. Mainland investment in the city’s equities jumped after China’s securities regulator broadened funds’ access to the shares in March, and HSBC Holdings Plc says more policy changes to encourage use of the link are on the way.
“There’s an arbitrage opportunity, that’s for sure,” Bernard Aw, Singapore-based market strategist at IG Ltd., said by phone. “I see the rally going further in H-shares. There’s pent-up demand after the long Easter break.”
The Hang Seng China Enterprises Index of mainland companies listed in Hong Kong soared 5.8 percent Wednesday, its steepest rally since December 2011 and highest close since April of that year. The Hang Seng Index surged 3.8 percent, also the biggest advance in more than three years, while the Shanghai Composite Index rose 0.8 percent. Hong Kong markets were closed the past three days for holidays, with the mainland benchmark gauge climbing 3.5 percent in that span.
The Hang Seng China AH Premium Index, which tracks price discrepancies between dual-listed shares, dropped 5 percent to 128 today. The measure last month rose to the highest since October 2011, signaling a 36 percent premium on mainland shares compared with their Hong Kong counterparts.
“The valuation gap makes H-shares cheap,” HSBC analysts led by Steven Sun, the head of China equity strategy at the bank, wrote in a report Wednesday. “We expect a series of policy moves to make it easier and more appealing for the huge numbers of mainland retail investors who are driving up A-shares to start switching their attention to Hong Kong.”
The 10.5 billion yuan quota for buying Hong Kong stocks through the link ran out at 2:08 p.m. local time, triggering a halt in buy orders for the rest of the day. Before today, the highest daily investment total was 2.6 billion yuan on March 30, according to data from the bourses. That figure was overtaken in the first half-hour of Wednesday trade.
Hong Kong share turnover through the program reached a record HK$15 billion ($1.9 billion) in the morning session Wednesday, 5.6 percent of the total for the market, according to Hong Kong Exchanges & Clearing Ltd. Stock worth HK$250 billion changed hands in Hong Kong across the full day, an all-time high, data compiled by Bloomberg show. The exchange operator’s own shares soared 12 percent to the highest since December 2007.
“Sentiment is very bullish, especially for those clients that missed the China rally,” said David Welch, head of equity sales trading at Reorient Group in Hong Kong. “They want to buy in Hong Kong.”
On the mainland, where turnover also surged to a record Wednesday, foreign investors used the link to pull money out of Shanghai. Net selling climbed to 3.5 billion yuan, the highest daily total.
The outflows came even as the Shanghai Composite briefly surpassed 4,000 for the first time since 2008. The index has doubled since January 2014 as traders borrowed a record amount of money to buy shares and new investors opened stock accounts at an unprecedented pace.
Gauges of small and mid-cap stocks have led gains in Hong Kong since flows from across the border began picking up at the start of last week. The Hang Seng Composite Small Cap Index has surged 19 percent in a five-day rally, its biggest since November 2008, while the Hang Seng mid-cap gauge has jumped 15 percent.
NetDragon Websoft Inc. and Gome Electrical Appliances Holding Ltd. were among the best performers in Hong Kong today, both posting the biggest gains in at least five years. Price gaps on dual-listed stocks narrowed, with Hong Kong-listed shares of Haitong Securities Co. soaring 19 percent. The brokerage climbed just 2.9 percent in Shanghai, where it still trades at a 46 percent premium.
The bourse tie-up marks one of China’s biggest steps to open up its capital account and broaden investment options for the world’s most-populous nation. Regulators plan to open a similar investment program between Hong Kong and Shenzhen, where many of China’s smaller companies are listed.
The requirement for Chinese individual investors to have at least 500,000 yuan ($80,574) in their trading accounts to use the Shanghai link will be relaxed or scrapped this year, according to HSBC. Margin trading is likely to be introduced, and an expected agreement to allow sales of mutual funds to investors on both sides of the connect will boost appetite for Hong Kong shares, according to the bank’s report.
The Shanghai Composite Index surged 92 percent in the year through Tuesday, more than any of the world’s major stock gauges. The H-share index advanced 25 percent.