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China money to Hong Kong market tripled in 2019 amid protests

Mainland investment offset international capital flight

HONG KONG -- Purchases of Hong Kong stocks by mainland investors tripled in value on a net basis last year, as Chinese bargain hunters propped up the financial hub amid the massive anti-government protests.

Chinese investors bought 249.3 billion Hong Kong dollars ($32 billion) more in equities than they sold in 2019, an infusion that helped offset the exodus of international funds from the territory.

Hong Kong's benchmark Hang Seng Index gained 9% last year. Though the growth was slower than the 22% rise logged by the Shanghai Composite Index, the Hang Seng remained robust even after the pro-democracy demonstrations kicked into high gear in June.

Chinese investors buy Hong Kong equities through the "stock connect" programs established in Shanghai and Shenzhen. The data shows that equity purchases mounted after June, partly due to the perception that stocks simultaneously listed in Hong Kong and mainland China were bargains.

Investors bought HK$58.6 billion worth of shares on a net basis in August, when demonstrators orchestrated sit-ins at Hong Kong International Airport.

The Hong Kong market lists over 1,200 Chinese enterprises, occupying more than 70% of the aggregate market capitalization. The number of floats by Chinese enterprises jumped 40% over the past five years.

Mainland money also poured into Hong Kong when smartphone maker Xiaomi and food delivery app Meituan Dianping became available via the stock connect in October.

Yet other signs point to investors yanking money from the territory. Capital outflows from investment funds in Hong Kong have totaled roughly $5 billion since April, according to the Bank of England's financial stability report, published last month.

The capital flight, equating to 1.25% of Hong Kong's gross domestic product, started soon after the local government introduced a bill allowing extradition to the mainland and elsewhere -- the spark that ignited the protest movement.

"These political tensions pose risks, given Hong Kong's position as a major financial centre," the BOE report said.

British banks HSBC and Standard Chartered play outsize roles in Hong Kong's financial industry. Demonstrators vandalized HSBC's branches and ATMs after the bank froze an account holding donations used to support the pro-democracy activists.

The Hong Kong Monetary Authority has said repeatedly that there are no signs of any serious capital flight. But evidence suggests that the affluent are preparing to move assets, such as by opening accounts outside of Hong Kong.

Singapore appears to be a destination of choice for the capital outflow, based on international financial data.

"Singapore might have received, at most, $6 billion of Hong Kong outflows between May and October," said Cliff Tan, an analyst at MUFG Bank.

"It's possible that, in the long term, Hong Kong's role as an international financial center will transfer partly to Singapore and other cities in Asia," said Xie Yaxuan, chief economist at China Merchants Securities. "Hong Kong needs to resolve its distorted industrial structure and the disparities between the rich and poor."

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