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Hong Kong stock boomlet tests China’s capital dam

Apr 11 , 2015

If the man-made dam that separates China’s financial markets from the rest of the world were removed, which way would the money flow? The sudden boom in Hong Kong’s stock market, driven by mainland Chinese money and the promise of more to come, should leave no doubt. The answer is out – and at considerable speed.

Hong Kong’s benchmark stock index rose as much as 6.4 percent on April 9, a day after Chinese investors maxed out their quota on a cross-border investment scheme launched five months ago. The rush is hard to square with actual events. True, China’s regulators on March 27 said the mutual fund industry, with 4.4 trillion yuan ($716 billion) of assets at the end of 2014 according to Z-Ben Advisors, can now participate in the Shanghai-Hong Kong Stock Connect. But it’s unlikely many have. Tweaking paperwork could take weeks. A new fund product requires around 20 days to get ready, Z-Ben estimates.

Perhaps investors have just got wise to the gulf between Shanghai and Hong Kong stocks. Shares in Shanghai Electric Group, one of the more popular trades, used to cost 69 percent less in Hong Kong two weeks ago; now the gap is 47 percent. But that is not new. And the stocks aren’t yet interchangeable – though the Hong Kong exchange is considering a way to create something like substitutability, people familiar with the situation say.

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