Strong Hong Kong Dollar Signals A-Share Rally: Chart of the Day

The Hong Kong dollar’s move to the stronger end of its trading range is a bullish sign for shares traded in Shanghai, according to China Merchants Securities Co.

The CHART OF THE DAY shows the Shanghai Composite Index rose 7.5 percent in July as Hong Kong’s currency traded near HK$7.75 versus the greenback, the upper limit of the fixed exchange rate. The city’s dollar last tested the strong end in the fourth quarter of 2012 and the stock gauge, which tracks yuan-denominated equities known as A shares, rose 15 percent in December that year. Before that was the November 2008-December 2009 period, when the securities rallied in 12 of 14 months. The Shanghai Composite surged 80 percent in 2009.

“Funds usually move into or out of Hong Kong in the same way they do for the mainland, so overseas funds should also be entering domestic markets, especially considering the improving economic fundamentals,” said Xie Yaxuan, Shenzhen-based head of macro research at China Merchants Securities, the nation’s third-largest brokerage. “Momentum traders simply buy based on the historical correlation.”

China’s manufacturing grew the most in more than two years in July, according to data last week, while the yuan has gained 0.55 percent in the past month. The Hong Kong Monetary Authority said July 26 it expects the city’s exchange rate to stay strong in the near term due to dividends, mergers and acquisitions and new listings.

Overseas investors boosted holdings of Chinese shares to 364 billion yuan ($59 billion) in the second quarter, from 319 billion yuan three months earlier, according to People’s Bank of China data. Under a plan announced in April to link the Shanghai and Hong Kong bourses, investors may trade 10.5 billion yuan of Hong Kong shares a day through the Shanghai exchange, and 13 billion yuan of mainland equities through Hong Kong. The city’s Hang Seng Index rose 6.8 percent in July.

The Shanghai Composite will probably end its world-beating rally within days and fall about 10 percent, said Tom DeMark, the developer of market-timing indicators. The losses may occur over about six months, said DeMark, founder of DeMark Analytics LLC in Scottsdale, Arizona.

— With assistance by Helen Sun

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