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April 11 (Bloomberg) -- Hong Kong Exchanges & Clearing Ltd. surged the most in five years after a deal to link Shanghai and Hong Kong markets that gives Chinese investors unprecedented access to Macau casino stocks and Tencent Holdings Ltd.
HKEx jumped 12 percent to HK$146, capping the biggest gain since December 2008. Under a plan announced yesterday, wealthy individuals will be allowed to buy Hong Kong equities through the Shanghai exchange, broadening their investment options from a limited number of funds. The change will boost brand-name Chinese companies whose shares trade only in Hong Kong, while giving arbitragers more scope to narrow price differences between dual-listed stocks, said Bank Julius Baer & Co. and Invesco Ltd.
The agreement, which also allows overseas investors to buy mainland shares through Hong Kong, furthers China’s push to reduce capital controls after policy makers pledged the biggest expansion of economic freedoms since the 1990s and widened the yuan’s trading band. The announcement is a boost to efforts by Hong Kong bourse head Charles Li to position the city as the investment gateway to the fastest-growing major economy.
“It will give the market more confidence that the government is serious about opening up,” said Kelvin Wong, a Hong Kong-based analyst at Julius Baer, which has about $287 billion under management. “Our recommendation is to look for good fundamental names that are listed exclusively” in Hong Kong, he said.
A 2007 plan to allow Chinese to invest directly in Hong Kong stocks, which was later scrapped, helped push the Hang Seng Index to a record that year.
China’s Premier Li Keqiang said yesterday that the link will lead to deeper integration with international markets. The nation is loosening capital controls as it seeks a greater role for the yuan in global trade.
Policy makers are also trying to introduce more investment options after a flood of money into real estate and loosely regulated wealth-management products exposed citizens to property bubbles and the risk of defaults.
“The plan has support from the very top and is unlikely to fail,” Wang Weijun, a strategist at Zheshang Securities Co. in Shanghai, said by phone.
Benchmark equity gauges in both cities advanced more than 1 percent yesterday, led by brokerages, and trading surged to levels more than 40 percent above the 30-day average as investors piled into the biggest beneficiaries from the deal.
Tencent, Asia’s biggest Internet company, jumped 7.6 percent yesterday to extend its rally during the past five years to 811 percent. Galaxy Entertainment Group Ltd., the Macau casino operator owned by billionaire Lui Che-woo, advanced 5.3 percent, while the gap between Hong Kong and mainland-traded shares narrowed the most in two months.
Galaxy slipped 3 percent today, while Tencent dropped 6.7 percent after a selloff in U.S. technology shares overnight raised concerns that valuations are too high. The Hang Seng China AH Premium Index increased 1.3 percent, signaling the prices of dual-listed shares moved closer to par.
“Once implemented, it is likely we’ll see liquidity improve and the valuation gap between A and H shares will be arbitraged,” John Ford, the chief investment officer for Asia Pacific at Fidelity Worldwide Investment, said by e-mail. Yuan- denominated stocks on mainland exchanges are known as A shares, while H shares refer to Chinese companies listed in Hong Kong.
Under the pilot program due to start in about six months, Chinese institutions and investors with at least 500,000 yuan ($80,483) in their securities accounts will be able to buy Hong Kong shares using yuan through mainland brokerages, which will place their orders through Hong Kong’s exchange, according to a statement from the city’s Securities & Futures Commission.
Investors will be limited to the 241 stocks in the Hang Seng Composite Large Cap Index and the Hang Seng Composite Mid Cap Index, along with companies with dual listings. Investment will be subject to a total quota of 250 billion yuan and a daily limit of 10.5 billion yuan.
Overseas institutions and investors can trade shares on the SSE 180 Index and SSE 380 Index, as well as dual-listed stocks, using Hong Kong brokerages, according to a Hong Kong government statement. There will be a daily cap of 13 billion yuan and a total quota of 300 billion yuan.
Currently, Chinese investors can only buy securities outside the mainland through asset managers as part of the Qualified Domestic Institutional Investor program, which began in 1996.
Existing rules restrict overseas money managers seeking investments in China to foreign currency-denominated B shares, while only those approved under the Qualified Foreign Institutional Investor program can invest in yuan-denominated A shares.
Approved QFII quotas total about $54 billion, according to the State Administration of Foreign Exchange. China Securities Regulatory Commission Chairman Xiao Gang said yesterday the Hong Kong-Shanghai tie-up may replace the QFII program to some extent.
Tsingtao Brewery Co. became the first mainland company to sell H shares to international investors in July 1993 in Hong Kong, then a British colony. More than 160 companies have sold H shares in the city since then.
The valuation gap between H and A shares narrowed yesterday. Zhejiang Shibao Co., a maker of steering-system parts, surged by a record 65 percent in Hong Kong. The stock, which slipped 11 percent today, still trades at an 82 percent discount to its A shares, according to data compiled by Bloomberg. That’s the most among dual-listed companies in Hong Kong. Zijin Mining Group Co., the nation’s largest gold producer, rallied 4.8 percent today to bring its two-day gain to 15 percent. The shares are priced 31 percent below mainland- listed counterparts.
“From a trading perspective, if you are an overseas investor, you will buy stocks traded at a discount to domestic A shares and stocks with a scarcity premium, or those that you don’t have in China,” said Paul Chan, the Hong Kong-based chief investment officer for Asia ex-Japan at Invesco, which oversees about $787 billion.
Multiples will expand for mainland-listed food and beverage companies including Kweichow Moutai Co., analysts led by Jin Feng at Shenyin & Wanguo Securities Co. wrote in a report today. The maker of baijiu liquor’s shares climbed 3.9 percent in Shanghai to the highest close since August.
Increased liquidity and access to both global and mainland investors may make Hong Kong more attractive to companies planning initial public offerings, according to a note from Morgan Stanley today.
The quotas announced yesterday still only represent a small slice of the market capitalization of shares in each market. The 250 billion yuan cap on Hong Kong stock investments is equivalent to about 1 percent of the value of shares listed in the city, according to data compiled by Bloomberg. The 300 billion yuan limit for the mainland equates to about 2 percent of the Shanghai Composite.
Looser restrictions on capital flows aren’t enough to spark a sustained rally in Chinese shares, according to Mikio Kumada, who helps oversee more than $25 billion as a Hong Kong-based global strategist at LGT Capital Partners.
The Hang Seng China Enterprises Index of H shares entered a bear market on March 20, while the Shanghai Composite Index has tumbled 32 percent in the past four years. Data yesterday showed the nation’s exports and imports unexpectedly fell in March, adding to concern that China will fall short of its 7.5 percent economic growth goal.
“Yes it’s a good thing, it’s part of the reforms, but a bear market is a bear market,” said Kumada. “In terms of whether this is going to be a trigger for A shares or any other Chinese public stock market to enter a bull market -- the answer is no.”
The loosening won’t help mainland investors access shares in one of China’s best-known businesses, Alibaba Group Holding Ltd. The Hangzhou, China-based company is planning to go public in the U.S. after the Hong Kong regulator declined to relax rules blocking Alibaba’s proposed governance structure.
Yesterday’s announcement is just one step toward a freer flow of capital between mainland and overseas markets, according to Zheshang Securities’s Wang. Authorities may remove limits on the size of cross-border equity flows in three to five years and China’s exchanges may eventually become completely integrated with Hong Kong, the strategist said.
The bourse link-up could be expanded over time to other asset classes such as bonds and commodities, according to Jefferies Hong Kong Ltd. The increased access to yuan funds in Hong Kong also means the Chinese currency will take over a much larger slice of transactions in the city, and may eventually make the Hong Kong dollar redundant, Jefferies strategists led by Sean Darby wrote in a report yesterday.
“The move further reinforces our confidence in investing in Asia and our positive stance on China,” Bill Maldonado, the chief investment officer for equities at HSBC Global Asset Management, said by e-mail. “We see long-term opportunities arising from the reform.”