Markets

Shuli Ren is a Bloomberg Gadfly columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.

When investors place large orders on China Mobile Ltd. on a sleepy Friday afternoon in high summer, it's a good sign that Hong Kong's bull train is hard to stop.

The catalyst was AAC Technologies Holdings Inc., an Apple iPhone supplier. AAC's management toned down its second-quarter outlook for revenue growth, prompting analysts from Jefferies Group LLC to Morgan Stanley to lower their price targets. Its shares dropped as much as 15.3 percent, while other growth stocks, such as Sunny Optical Technology Group Co. and Geely Automobile Holdings Ltd., were collateral damage.

Investors didn't leave the market, though. Instead, there were $300 million of trades in China Mobile, twice as much as the daily average and the most in more than a month, sending the shares 1.9 percent higher. The logic was that while China Mobile might be boring, it's a value substitute for technology stocks that have soared 55 percent in China this year, and a safe place to park cash.

Let's credit liquidity, too, especially from foreign investors. In the five-day period ended July 19, the latest for which data are available, global funds bought a net $874 million of Hong Kong and offshore Chinese stocks, the largest weekly inflow since mid-May. Cash coming from mainland investors, meanwhile, remains limited.

Muted Connect
Daily average southbound inflows softened to HK$1.4 billion last week, from HK$2.3 billion the week earlier
Source: Bloomberg

To help gauge the impact of cheap money in Hong Kong, just look at interest rates. In theory, they should track those in the U.S., since the local currency is pegged to the dollar. But the Libor-Hibor spread is now at the widest since the financial crisis.

Flush With Cheap Money
Interest rates in Hong Kong haven't risen despite Fed rate hikes
Source: Bloomberg

That spread was even wider in 2006 and 2007, according to Nomura Securities Co., because of the heavy IPO schedules of Chinese state-owned companies. The offering of Bank of China Ltd. in Hong Kong alone, in June 2006, was oversubscribed 76 times and tied up $37 billion of funds in the subscription process. 

This time, China seems to have persuaded global investors its economy is doing well. GDP expanded 6.9 percent in the first half (if you believe the numbers) and retail sales growth accelerated from 9.5 percent in May to 10 percent in June, the fastest pace since 2015. 

After a stellar rally this year, offshore Chinese stocks are now just under 10 percent shy of the record high reached in April 2015. Excluding notoriously cheap banks, companies in the MSCI China Index are trading at an average 17.5 times forward earnings, a good standard deviation above the 10-year average. Value investing is becoming more difficult.

Breaking Out
MSCI China is at its most expensive valuation since 2010

Still, there are plenty of stocks in Hong Kong that can be considered cheap. Those big Chinese banks continue to trade below book value, and there are dividend plays, too: Take the reaction to CK Infrastructure Holdings Ltd. and Power Assets Holdings Ltd. after special dividends last week.

If standing in front of a liquidity train seems like a bad idea, an alternative might be riding it.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Shuli Ren in Hong Kong at sren38@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net