Foreigners Turn Net Sellers of China Shares Through Link

International investors briefly turned net sellers of Shanghai shares through the Hong Kong bourse link for the first time as the premium on mainland stocks soared to a 16-month high.

The daily balance on Shanghai equity-buying through the program rose above the 13 billion yuan ($2.1 billion) quota from the 9:30 a.m. open to 9:54 a.m. local time, signaling more investors were selling than placing buy orders, according to exchange data compiled by Bloomberg. An index tracking the price of dual-listed shares on the mainland versus Hong Kong rose to the highest since July 2013, extending its jump to 6.1 percent since the People’s Bank of China unexpectedly announced interest-rate cuts on Nov. 21.

“I’d call it short-term profit-taking,” said Nader Naeimi, who helps manage about $125 billion as the head of dynamic asset allocation at AMP Capital Investors Ltd. in Sydney. “The tail risk for China has been significantly reduced with the PBOC’s action. I doubt selling of Shanghai shares by foreign investors will continue. Overall we’re more bullish on China than Hong Kong.”

The discount on Air China Ltd.’s Hong Kong shares compared to the carrier’s A-share listing widened to 23 percent from 16 percent at the end of last week, according to Bloomberg data. The discount on China Coal Energy Co.’s H-shares expanded 5.4 percentage points to 30 percent.

Unfilled Quotas

About 16.5 percent of the combined daily quotas were used in the second week of the stock connect, a drop from 24.1 percent from the debut week. The exchange link is part of China’s effort to open up its capital account, increase global use of the yuan and turn Shanghai into an international financial center. The quota system allows China to retain some control over cross-border trading.

The Shanghai Composite Index jumped 7.9 percent last week, the most since October 2010, after the central bank unexpectedly cut lending rates to support an economy that’s expected to grow this year at the slowest pace since 1990. The PBOC may also soon cut reserve-requirement ratios, according to First Shanghai Securities.

China’s benchmark equity gauge rose 0.7 percent as of 11:39 a.m. local time to extend a three-year high. The Hang Seng Index dropped 1.8 percent in Hong Kong, poised for its biggest decline in seven weeks. About 9 percent of the daily quota balance for investments in Shanghai through the link had been used, compared with 1.5 percent of the Hong Kong limit.

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