Chinese Rejecting Hong Kong Stocks as Link Startup Looms

Jiang Siqiang has a whole list of reasons he’s not interested in shifting any of his money from mainland China’s equity markets into Hong Kong.

As the 67-year-old retiree sips tea and watches stock prices flicker across the screen at a brokerage in Shanghai, he ticks them off one by one. Shanghai shares tend to trade at cheaper valuations than those listed 761 miles (1,224 km) to the south in the former British colony. Hong Kong’s market rules are unfamiliar, and he’s also turned off by the poor track record of Chinese money managers who buy foreign shares through the Qualified Domestic Institutional Investor program.

“Even QDII funds are losing money overseas, and they are managed by experts,” Jiang said at a Changjiang Securities Co. outlet in Shanghai’s Pudong district. “I wouldn’t buy Hong Kong stocks” any time soon.

Jiang’s misgivings provide a look into why 77 percent of mainland investors surveyed by CLSA Ltd. last month said they won’t participate in a planned exchange link between Shanghai and Hong Kong. Their lack of interest contrasts with Hong Kong traders’ growing appetite for mainland stocks, which are luring record inflows through exchange-traded funds. That suggests Hong Kong shares are poised to underperform their Shanghai counterparts, according to Aviate Global LLP, an institutional equity brokerage.

China, the biggest emerging economy, is counting on a successful exchange link to help liberalize its financial system, increase the role of the yuan and give its citizens more investment channels amid a slumping property market and increased risks from local wealth-management products. The program, set to start in October, allows a net 23.5 billion yuan ($3.8 billion) of daily cross-border purchases.

Through Train

Yet the allure of Hong Kong shares has diminished since 2007, when a proposal allowing mainland investors to buy equities in the city, dubbed the through train, sent the benchmark Hang Seng Index up 60 percent over three months before the plan was abandoned during the global financial crisis. The new exchange link is being implemented with limits on the number of available stocks, mostly larger companies, as part of an effort to attract a stable pool of investors.

Dual-listed Chinese companies trade at a premium of about 6 percent in Hong Kong over the mainland, versus a 44 percent discount at the end of 2007, according to the Hang Seng China AH Premium index. Anhui Conch Cement Co., China’s biggest producer of the building material, is 19 percent more expensive in Hong Kong than Shanghai, while the premium for China Life Insurance Co., the largest insurer, is 14 percent.

QDII Performance

Further hurdles include the 500,000 yuan minimum account size for mainland investors to participate in the link, and the exclusion of small-cap stocks, favored by speculative traders for their high volatility, according to CLSA and Aviate Global.

“Small retail investors won’t have too much interest in buying Hong Kong stocks under the program,” said Wang Weijun, a strategist at Zheshang Securities Co. in Shanghai.

An official at the Shanghai Stock Exchange declined to comment. Scott Sapp, a spokesman for Hong Kong Exchanges & Clearing Ltd., didn’t respond to phone and e-mail requests for comment.

Slumping demand for QDII funds, one of the few ways Chinese investors can currently gain access to stocks outside the mainland, is an indication of tepid interest in the exchange link, Francis Cheung, the head of China and Hong Kong strategy at CLSA, said at a briefing in Hong Kong on Aug. 26.

Assets in the funds dropped to 53 billion yuan at the end of the second quarter, the lowest level since 2011, according to Shanghai-based research firm Z-Ben Advisors.

ETF Bets

The first four QDII funds -- Harvest Oversea Investment Fund, China AMC Global Equity Select Fund, China Southern International Selection Allocation Fund and CIFM Asia-Pacific Advantage Fund -- have lost between 10 and 30 percent since their inception in late 2007, according to data compiled by Bloomberg. That compares with a 7.2 percent gain for the MSCI World Index.

Meanwhile, Hong Kong investors are already adding exposure to mainland shares through exchange-traded funds, betting that their valuation discounts will narrow as the exchange link makes it easier for arbitragers to move money between the markets. The two biggest ETFs tracking China’s yuan-denominated A shares, both listed in Hong Kong, lured about $2.7 billion in the past two months, according to data compiled by Bloomberg.

“Short term, you could see A shares outperform,” Robert Buckley, managing partner for Asia at Aviate Global, said in an e-mail from Hong Kong.

Casinos, Internet

There are some mainland investors who are looking to use the exchange link to buy Chinese companies without local listings, said Earl Yen, chief investment officer at CSV China Opportunities Ltd. in Shanghai, which oversees more than $230 million. Those include SJM Holdings Ltd., Stanley Ho’s Macau casino operator, and Tencent Holdings Ltd., Asia’s largest Internet firm, he said.

Interest in the link may grow as mainland investors learn more about the Hong Kong market, said Sally Wong, chief executive officer of the Hong Kong Investment Fund Association.

“I won’t judge the success on day one,” she said. “It will depend on investor access to education and the pool of stocks available. You don’t want it to be like the through-train in 2007, when investors rushed in. You want a more sustainable model.”

‘No Rush’

Mainland investors have only recently regained appetite for local shares after the Shanghai Composite Index lost $460 billion of market value in the three years through May, the most in the world, while almost 5 million stock accounts were liquidated. The Shanghai Composite fell 0.3 percent to 2,311.68 at today’s close, after gaining as much as 1.1 percent.

The Shanghai gauge has rebounded 16 percent since mid-March and the pace of new account openings rose to a six-month high in the week ended August 22 amid speculation the government will take steps to bolster economic growth and support equities. Initial public offerings on the mainland this year have surged an average 43 percent in their first day of trading.

“We have all the bigger companies listed here, and many of them are cheaper than their Hong Kong stocks,” said Jiang, the Shanghai retiree. “I need to watch the Hong Kong stock market for a while. There’s no rush to buy.”