Cheap Shanghai stocks in demand

Trade skewed heavily towards the northbound flow on the debut of the through train scheme as foreigners pile into railway and liquor plays

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Cheap Shanghai stocks in demand

Trade skewed heavily towards the northbound flow on the debut of the through train scheme as foreigners pile into railway and liquor plays

Ray Chan and Jeanny Yu
18 November 2014

Mainland railway and liquor stocks were some of the top picks for foreign investors who went on a buying spree to mark the first day’s trade under a much-anticipated scheme linking the Hong Kong and Shanghai share markets.

Institutional funds in Hong Kong yesterday bought 1.81 billion yuan (HK$2.3 billion) of shares in Daqin Railway and 1.37 billion yuan of stock in Kweichow Moutai, the distilled liquor famed for its high prices and limited production, Hong Kong Exchanges and Clearing said.

SAIC Motor, Ping An Insurance and dairy firm Inner Mongolia Yili Industrial Group filled out the top five most actively traded stocks.

The rush by foreign investors into the cheaply valued mainland stocks saw the daily quota of 13 billion yuan filled before 2pm yesterday.

Mainland investors, most of whom retail traders, used just 1.8 billion yuan, or 17 per cent, of the 10.5 billion yuan daily quota for purchases of Hong Kong stocks in a lopsided start to the through train scheme.

In contrast to the meagre inflows into Hong Kong, half of the quota for the northbound flow was filled in the first 15 minutes, the exchange said.

“Foreign fund managers are building their exposure to Shanghai-traded stocks in a number of specific industries like consumer names and concepts related to national defence,” said Ben Kwong Man-bun, a director of KGI Asia.

“Arbitragers’ interest in buying the valuation between Chinese shares traded in Hong Kong and Shanghai has significantly been lowered as the gap narrowed over the past six months.”

Kwong said market participants expected the quota system to be revised in six months, citing concerns over sell orders and unused quotas in the southbound trade.

HKEx chief executive Charles Li Xiaojia reiterated that the quota system and a planned extension into the Shenzhen stock exchange would be reviewed when “the timing is ripe”.

“Capital from the mainland should gradually increase as China is going global,” Li said yesterday.

Technology stocks drew the most interest from mainland investors, with Tencent Holdings and Semiconductor Manufacturing International Corp the top two, while China Mobile and insurer AIA Group followed.

HKEx is also expected to announce rules on short selling in mainland stocks early next year.

The reticence of mainland investors towards Hong Kong stocks was due partly to expectations of a continued rise in the yuan, while many are looking to buy stocks that can beat the 5 per cent return offered by mainland government bonds.

The yuan has been on a steady path of appreciation, rising more than 30 per cent since the exchange rate reform in 2005.

Mainland brokers also blame a shorter-than-expected preparation time that left them in a rush to educate their mostly retail clients. The fact that many mainland individual investors had already found ways to buy Hong Kong stocks before the scheme started dampened interest as well.

On the flipside, buying into mainland shares allows institutional investors to enjoy the appreciation story of the yuan and an additional channel to buy undervalued high-dividend stocks such as banks and insurance firms, including Ping An and Industrial and Commercial Bank of China.

Citi said in a research report yesterday that a further US$600 billion was expected to flow into the mainland stock market in the next few years as international investors increased their exposure to mainland shares from 2 per cent now to 7 per cent by 2020.

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