The manic trading that makes China the world’s most volatile stock market is seeping across the border into Hong Kong.
Swings in the 10 Hong Kong shares most traded by mainland investors over the city’s exchange link more than tripled in April, increasing at almost twice the rate as the benchmark Hang Seng Index. Last month, volatility in the most-active link shares, including Hanergy Thin Film Power Group Ltd. and Evergrande Real Estate Group Ltd., was little changed on average even as fluctuations in the Hang Seng shrank 30 percent.
While Chinese investors have used up just 40 percent of the link’s quota for stock purchases, their favorite shares show how price patterns are already changing as authorities give the world’s biggest population greater access to overseas investments. Hong Kong traders say their counterparts in China - - where individual investors have fueled a world-beating surge in domestic shares -- focus primarily on price momentum, rumors and the potential for quick profits.
“It made us have shorter holding periods as the moves can reverse on you faster these days,” said Mikey Hsia, a trader at Sunrise Brokers LLP in Hong Kong. “Hanergy is a key example. When the stock connect got hold of it, it took it to the moon” before shares crashed on May 20 and were suspended by the Hong Kong exchange, he said.
Mainland investors’ penchant for volatility was on display Thursday as the Shanghai Composite Index tumbled as much as 5.4 percent, before rallying to end the day with a 0.8 percent gain. The gauge’s swings over the past 10 days are bigger than all of the 70 other benchmark indexes tracked by Bloomberg worldwide. It rose 1.5 percent on Friday to the highest level since January 2008, while the Hang Seng index dropped 1.1 percent.
Chinese investors are gaining unprecedented freedom to bring their own brand of trading to overseas markets as the government eases capital controls to promote international use of the yuan.
The seven-month-old exchange link with Hong Kong lets them buy a net 10.5 billion yuan ($1.4 billion) of shares in the former British colony each day. Authorities will soon let some wealthy individuals buy international shares and other assets under the so-called QDII2 program, China’s Securities Times reported last week.
In Hong Kong, “I have people telling me now that they’re concerned about this volatility,” said Herald van der Linde, the head of Asia-Pacific equity strategy at HSBC Holdings Plc. “It becomes a little bit more like mainland China.”
Hong Kong’s bourse is considering changes to its trading rules that would give investors a “cooling-off period,” limiting trades to a fixed range for five minutes whenever a stock price spikes more than 10 percent. The exchange currently has no limits on intraday swings and mainland bourses cap daily moves at 10 percent.
While trading by Chinese investors has helped fuel some of the biggest swings on Hong Kong’s exchange, overall inflows through the bourse link have been tepid so far. Aside from a few days in April when net purchases surged, Chinese traders have tended to leave most of their daily quota unused.
For stocks with some of the biggest volume through the link, however, price swings are surging. The 20-day historical volatility of Hanergy, the Chinese solar maker being probed by Hong Kong regulators, more than tripled in May before trading was halted. Price swings in Evergrande, the developer that sold $593 million of new shares last week, jumped 75 percent.
“You have new breed of investors coming in, it’s the China angle,” said Jeffrey Chan, chairman of the Hong Kong Securities Association. “We’re seeing more liquidity pouring in from China, and we’ve seen more volatility.”