Hong Kong stocks to maintain rally but Beijing wary

Hong Kong stocks stormed to seven-year highs under a new policy that allows Chinese investors easy access to the city's bourse, but while analysts say the rally has some way to go they warn it will be tempered by cooling measures from a nervous Beijing.

Buoyed by hopes of China stimulus to support a slowing economy, mainlanders have been making the most of easier restrictions on a cross-border exchange link-up to flood into the southern city after a year-long rally in Shanghai that has doubled its value.

The rally in the Hang Seng Index resembles the explosion in Hong Kong's property market, which has seen prices soar as flush mainlanders pour in.

But Hong Kong shares fell 2.02 percent Monday after China last week tightened financing rules for margin-trading while allowing fund managers to lend equities for short selling. On Tuesday they bounced back, jumping 2.79 percent.

The moves were seen as a bid to stem speculation by the mostly private retail traders north of the border who have borrowed vast sums to make a quick profit.

However the China Securities Regulatory Commission insisted the new rules were not designed to cool the market, but to foster stable development.

"They don't want the share market to go crazy -- they want a slow bull market," said analyst Francis Lun, CEO of Hong Kong-based Geo Securities.

"They are afraid that the market will get ahead of itself and create a bubble."

Lun said the regulators' move may temper sentiment to an extent that would have a knock-on effect for Hong Kong.

"I think the rate of market rise will be slowed, although the bull market will continue," he said.

"More than 50 percent of shares in Hong Kong are China shares, so whatever happens in China will affect Hong Kong."

Analysts agreed that despite the new measures Hong Kong would continue to be seen as a place for bargains.

"In the short-term it will slow down (as) quite a lot of investors are trying to take profits," said Castor Pang, Core Pacific Yamaichi head of research.

But he described that as a "pull-back", rather than a downward trend.

"In the long-term... the discount in shares seems to be a major driver," Pang said.

The creation in November of the Stock Connect trading platform between Hong Kong and Shanghai was seen as a key step towards making China's yuan currency freely convertible.

Officials trumpeted the link as opening up China's closeted stock markets to the outside world, giving foreigners access to Chinese companies not quoted elsewhere.

However, initial demand was lacklustre, prompting a decision in March to include Chinese mutual funds, which opened the floodgates that saw turnover in Hong Kong hit record highs twice this month.

The Hang Seng Index has risen 13 percent since the Stock Connect was widened, and seen its best performance since December 2007.

 

- 'I still want to buy' -

 

The rally has led to some huge gains for some chips, with Hong Kong Exchange and Clearing surging 50 percent in the first two weeks of April, China Mobile up 14 percent and Lenovo jumping almost 20 percent.

Like many other mainland Chinese investors, You Jianhong, who works in the finance industry, believes Hong Kong stocks are a bargain.

"It's cheap and the valuations are low," You, who just opened her Shanghai-Hong Kong Stock Connect trading account, said.

"The handling charge is quite high but I still want to buy," she said, adding that Hong Kong stocks were not limited by a 10 percent daily up or down limit like mainland markets, so that was more attractive for trading.

China is now working on setting up a trading link between Hong Kong and neighbouring Shenzhen's stock market, where daily trading volumes sometimes exceed those of Shanghai.

The new link-up, which Premier Li Keqiang said would be implemented "at an appropriate time", is being seen as accelerating the internationalisation of the A-share market.

Pang said that while the easier access to Hong Kong would continue to spur investors, they would still have one eye on stimulus policy, although he added that they are "still cautious about whether the Chinese government will successfully turn the economy around".

Official data showed China's economy grew 7.0 percent in January-March, the slowest quarterly rate in six years at the height of the global financial crisis.

That sparked hopes for further monetary easing. The people's Bank of China has cut interest rates twice since November and on Sunday lowered the amount of cash lenders must keep in reserve for the second time this year.

And Li last month suggested the government had the weapons to support growth if necessary.