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.”

China Daily (Canada) - - FRONT PAGE -

volatil­ity.

“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 oswald@chi­nadai­lyhk.com

PHOTO PRO­VIDED TO CHINA DAILY

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

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