Share of the action I do not think the Hong Kong share market is going to be A-sharized despite recent surges in turnover ... Equity markets in Hong Kong and Shanghai still possess their distinctive characters.”
“Judging from the shareholder composition structure factor, A-sharization is not happening in the Hong Kong equity market. Mainland capital still does not play a dominant role in the Hong Kong market,” Billy Mak Sui-choi, associate professor at the Hong Kong Baptist University’s Finance and Decision Sciences Department, told China Daily.
However, even if one accepts that the Hong Kong market is not A-sharized at present, greater volatility is forecast amid increasing correlation with the mainland and ample liquidity.
“We see a sharp rise in share market turnover for Hong Kong. We would welcome a more active market and this is positive for long -term development,” Baring’s Luo said.
“In the long run, the two markets will have more influence over each other.”
And Daiwa’s Kan said: “We should pragmatically face the reality of increased interaction between the Hong Kong and mainland share markets.”
He added: “The ShanghaiHong Kong Stock Connect provides one platform for mainland capital to venture out into different financial markets to seek investment returns.”
However, unlike Kan, Patrick Shum Hing-hung, investment manager at Tengard Fund Management Ltd, sees the massive inflow of mainland capital as a major factor in market movements. “Mainland capital is a part of the market liquidity seen. If mainland capital retreats from Hong Kong, the city’s equity market may slump,” Shum warned.
It may be noted that, amid sharp volatility in Shanghai, mainland regulators on April 17 announced a ban on shadow financing for equity purchases and increased the supply of shares available to short sellers.
Mainland stock- index futures tumbled in the wake of the clampdown and, signifi so did HSI Futures, highlighting the close interconnection between bourses on either side of the border.
Besides abundant liquidity, increasing synergy between the two markets is also making the Hong Kong scene more volatile.
“The Hong Kong market is becoming more closely correlated with its mainland counterparts. Mainland firms are taking up a major share in the company composition of the Hong Kong equity market, therefore the pace of economic development on the mainland and central government economic policies are exerting more influence on prices of Hong Kong-listed shares,” Baptist University’s Mak observed.
Investment bank Credit Suisse in its research report in March noted that the composition of the Hang Seng Index (HSI) is already skewed toward mainland companies, making the HSI increasingly decoupled from local economic development and more prone to being influenced by economic policies across the border.
Nearly 55 percent of HSI market capitalization is accounted for by mainland stocks whose corporate fundamentals have no relationship with the Hong Kong economy.
Another 22.5 percent are global/regional stocks of companies with a diversified earnings base and the fundamentals of the Hong Kong economy have a relatively small impact on these stocks, whereas the rest are stocks related to Macao gaming, Hong Kong property developers and Hong Kong retailers, and these equities also tend to be more influenced by mainland economic policies.
Fund managers highlight the fact that A-sharization can be examined from the angle that the A-share market will likely improve progressively.
Kevin Anderson, senior managing director and Asia Pacific head of investment at State Street Global Advisors Asia, said the inclusion of A-shares in the MSCI (Morgan Stanley Capital International) Emerging Markets Index should be a catalyst for change in the mainland A-share market.
In June last year, MSCI issued a statement indicating that it would not include mainland A shares in its Emerging Markets Index for 2014, but would still keep them on the screening list for 2015.
“The inclusion of A shares in the MSCI Index will promote accessibility for overseas institutional investors, in terms of exposure to the mainland equity market.
The process of increasing accessibility will make the A-share market more mature through enhanced market transparency and raise corporate standards at mainland firms,” Anderson added.
“The mainland investor culture will likely change in due course,” predicted Daiwa’s Kan. “Through the process of mutual interaction, mainland investors are going out to learn the investor culture and market mechanisms of different overseas markets.”
“More mutual market interaction is better for A-share market development because it would no longer be just a pure domestic equity market,” Kan emphasized. Contact the writer at email@example.com
Nearly 55 percent of Hang Seng Index market capitalization is accounted for by mainland stocks.
Ceajer Chan Ka-keung, secretary for financial services and the treasury