Hong Kong, China Stocks Jump on Cross-Border Trade Deal

Stocks rallied in Hong Kong and Shanghai, led by brokerages, after China said it would allow a combined 23.5 billion yuan ($3.8 billion) of daily cross-border trading in equities.

Haitong International Securities Group Ltd. and Guotai Junan International Holdings Ltd. surged at least 13 percent. Tencent Holdings Ltd. jumped the most since 2011, pacing gains by large Chinese companies without mainland listings. Zhejiang Shibao Co., a maker of steering-system parts, surged 65 percent to lead an advance by Hong Kong stocks trading at discounts to their Chinese counterparts.

The Hang Seng Index climbed 1.5 percent at the close, while the Shanghai Composite Index advanced 1.3 percent. Trading in both indexes climbed to levels more than 40 percent higher than the 30-day average as investors bet valuation gaps among dual-listed equities will narrow and that money will flow to the most-favored companies on each exchange. China’s Premier Li Keqiang said the link will lead to deeper integration with international markets.

“It’s a very important development for Hong Kong and it’s a step for China toward a more open capital account,” Ryan Tsai, an Asia equity strategist at Standard Chartered HK Ltd., said from Hong Kong.

The tie-up is part of efforts by China to free up capital flows in the world’s second-biggest economy, after the ruling Communist Party pledged the most sweeping reform package since at least the 1990s in November and widened the yuan’s trading band in March. Authorities are also trying to revive confidence in stocks as the Shanghai Composite trades 65 percent below its 2007 peak and valuations of Chinese shares in Hong Kong languish near the lowest valuations since 2001.

Trading Quotas

Investors will be able to trade 10.5 billion yuan of Hong Kong-listed stocks through the Shanghai exchange, and 13 billion yuan of mainland shares through Hong Kong, the China Securities Regulatory Commission said today.

The aggregate quotas for the cross-border trading are 250 billion yuan for Hong Kong-listed stocks, and 300 billion yuan for Shanghai shares, Hong Kong’s Securities and Futures Commission said. The limits may be adjusted in the future, and preparations for the link will take about six months, according to a statement from the regulator.

Brokerages climbed amid speculation trading volumes will increase. Guotai Junan International rallied to its highest level since November 2010. Haitong International Securities climbed 13 percent and Haitong Securities Co. advanced 7.5 percent. Citic Securities Co. jumped 9.2 percent in Hong Kong and rose 9.7 percent in Shanghai.

Scarcity Premium

Among companies without mainland listings, Tencent, Asia’s largest Internet company, advanced 7.6 percent and Lenovo Group Ltd., the world’s largest computer maker, added 4.9 percent. Sands China Ltd., the unit of Las Vegas Sands Corp., soared 6.8 percent to lead gains by casino operators in Macau.

“From a trading perspective, if you are an overseas investor, you will buy stocks traded at a discount to domestic A shares and stocks with a scarcity premium or those that you don’t have in China,” said Paul Chan, the Hong Kong-based chief investment officer for Asia ex-Japan at Invesco Ltd., which oversees about $787.3 billion.

Zhejiang Shibao surged the most on record in Hong Kong. The stock trades at an 80 percent discount to its A shares, the most among dual-listed companies in Hong Kong, according to data compiled by Bloomberg. Shandong Molong Petroleum Machinery Co., valued 72 percent below its A shares, rallied 36 percent.

Anhui Conch Cement Co. advanced by the 10 percent daily limit in Shanghai after trading at the biggest discount to its Hong Kong-traded shares among peers.

Valuation Gap

The Hang Seng China AH Premium Index rose 1.3 percent to 94.87, closer to the 100 level that signals parity between Shanghai and Hong Kong listed shares.

“The biggest impact will be a narrowing of the valuation gap between the two markets,” Wang Weijun, a strategist at Zheshang Securities Co. in Shanghai, said by phone today. “In the long term, we may see an integrated stock exchange in Shanghai, Shenzhen and Hong Kong and that will help raise China’s international image and lower trading costs. We may see the quotas for cross-investment in the two markets scrapped in three or five years and capital may flow freely.”

Shares earlier fell after data showed China’s trade unexpectedly shrank last month.

Outbound shipments declined 6.6 percent from a year earlier, the customs administration said in Beijing today, compared with the median estimate for a 4.8 percent increase in a Bloomberg News survey of 47 economists. Imports fell 11.3 percent, leaving a trade surplus of $7.71 billion.

Stock Swings

The CSI 300 Index added 1.6 percent. The Hang Seng China Enterprises Index advanced 0.4 percent. The gauge rebounded 13 percent since March 20 through yesterday as the government eased funding restrictions for financial companies and outlined a package of measures to support growth last week, including railway spending.

The Hang Seng China’s relative strength index, a momentum indicator used to identify market turning points, went from sending a buy signal to sell signal in just 13 days, the quickest since May 1995. Today’s swing in the Chinese stock gauge was the biggest in almost four months.

— With assistance by Shidong Zhang, and Kana Nishizawa

Before it's here, it's on the Bloomberg Terminal.