(Bloomberg) -- Hong Kong's stock market now has a sizable bulwark against global bearishness: Chinese buyers from north of the border.
After the benchmark Hang Seng Index plunged as much as 2.7 percent on Monday in the wake of a U.S. slump, mainland investors purchased a net 10.2 billion yuan ($1.6 billion) of the city's shares through exchange links with Shanghai and Shenzhen. That's the biggest inflow since Chinese authorities widened the investment channel in December 2016, according to data compiled by Bloomberg using daily quota usages. By the close, the Hang Seng's losses had narrowed to 1.1 percent.
For mainland funds facing limited investment options thanks to capital controls, buying Chinese companies in Hong Kong is an easy trade. Dual-listed firms like Bank of China Ltd. and China Shenhua Energy Co. have long been priced at a discount to their Shanghai shares, while a surging yuan against the Hong Kong dollar is making them cheaper still.
"Southbound liquidity is supporting the market and they're concentrating on buying Chinese financial companies because of their discount," said Steven Leung, executive director at UOB Kay Hian (Hong Kong) Ltd. "There will be more and more diversification from pension and life insurance money investing overseas and Hong Kong is still the first place for them to consider."
Such inflows are translating into bigger returns, making the trade even more appealing. The Hang Seng gauge of Chinese stocks in Hong Kong has jumped 18 percent in the past two months, compared with a 5.6 percent advance by the Shanghai Composite Index. The fact that H shares are mostly large-cap state owned companies is also appealing to mainland funds as they avoid smaller companies facing higher funding costs thanks to a deleveraging campaign.
Banks and airlines led gains in Hong Kong today, with China Citic Bank Corp. jumping 3.9 percent and Air China Ltd. climbing 2.7 percent. Both companies are more than 30 percent cheaper in Hong Kong compared with their mainland listings.
The outperformance of H shares should continue thanks to increased allocation from wealth management and overseas institutions, according to Citigroup Inc.
To contact the reporter on this story: Kana Nishizawa in Hong Kong at knishizawa5@bloomberg.net.
To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Sarah McDonald
©2018 Bloomberg L.P.
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