China’s exchange link is starting to live up to its promise as a gateway to Hong Kong’ stock market for mainland investors.
After failing to use more than 17 percent of the link’s daily quota in the first four months of the cross-border investment program, Chinese traders placed buy orders for the maximum amount of shares allowed on Wednesday and depleted almost the entire quota by the midday break Thursday. China’s move in March to expand link access to more mainland funds, along with growing speculation that valuation gaps between the two markets will close, is driving the surge in purchases.
The turnaround for a program that CLSA Ltd. dubbed the “Ghost Train” for its lack of participants in November is now spurring speculation that regulators will increase or remove quotas for the link, currently set at 10.5 billion yuan ($1.35 billion) for Hong Kong stocks and 13 billion yuan for Shanghai shares. That would further China’s plan to open up its capital account and boost global use of the yuan.
“The quota will probably get lifted now,” Sean Darby, the Hong Kong-based chief global equity strategist at Jefferies LLC, said by phone. “In a short space of time, it’s been extremely successful. Just remember about people complaining during the first few days that the link was opened, that there was no interest.”
The Shanghai exchange is studying raising quotas for the exchange link as part of its work plan this year, though there’s no timetable for any change, said a press officer from the bourse, who asked not to be named in line with exchange policy. The China Securities Regulatory Commission and Hong Kong Exchanges & Clearing Ltd. didn’t immediately respond to e-mailed requests for comment.
Shares of the Hong Kong bourse operator surged 9.4 percent on Thursday to the highest level since December 2007, while the benchmark Hang Seng Index jumped 3.7 percent on volumes more than three times the 30-day average for this time of day.
Mainland investors used up 9.2 billion yuan of the link’s daily quota on Thursday, while international investors were net sellers of Shanghai shares. The Hang Seng China AH Premium Index, which measures the price of mainland stocks over dual-listed counterparts, dropped 3.8 percent. The gauge still shows that mainland equities are 23 percent more expensive.
“The market is fully aware of the undervaluation of H-shares,” said James Cheng, who manages the Allianz Global Investors China Strategic Growth Fund in Taipei. “We see it as a valuable market with many undervalued, good targets.”
Authorities may view the shrinking premium as a sign of success for the program as they prepare to start a similar link between Hong Kong and China’s other major exchange in Shenzhen, Tim Condon, the Singapore-based head of Asian research at ING Groep NV, said by email.
Shanghai Simpleway Asset Management, which manages 2 billion yuan, is buying Hong Kong stocks through the exchange link and plans to at least double the proportion of the city’s shares in its portfolio, Gui Jiang, the firm’s general manager, said in a phone interview Thursday.
Any changes to the quota may be gradual because Chinese authorities want to maintain an “orderly” market, said Bernard Aw, a Singapore-based strategist at IG Ltd. A so-called Through Train plan to let mainland investors buy Hong Kong shares in 2007 sent the Hang Seng index surging before being abandoned.
“Increasing the quota will be a natural evolution for authorities,” said Kay Van-Petersen, a Singapore-based strategist at Saxo Capital Markets.