HONG KONG Hong Kong-listed stocks appear to have benefited most from the 3-year-old system of mutual access to equity markets in mainland China, even as the price gap between dual-listed stocks has widened in A-shares' favor.
Shares totaling $1.04 trillion changed hands between Nov. 17, 2014, and the end of October under the Stock Connect initiative, which lets international investors trade yuan-denominated A-shares listed in Shanghai and Shenzhen via licensed brokers in Hong Kong while allowing mainland financiers to bypass capital controls and trade Hong Kong-listed stocks.
Average daily turnover of northbound flows to Shanghai represented 1.14% of that market this year through October, down from 3.6% three years ago.
In the opposite direction, southbound flows contributed 7.2% to Hong Kong equities' average daily turnover, up from just 0.7% in 2014. Average turnover reached a record 4.47 billion Hong Kong dollars ($572 million) this year, nine times higher than three years ago.
Net capital flow from the mainland to Hong Kong totaled HK$637.5 billion over this period, while a net 326.3 billion yuan ($49.1 billion) went in the reverse direction, data from the Hong Kong Exchanges & Clearing shows.
Analysts think this channeling of liquidity through the trade link helped buoy the Hong Kong market, which has returned over 30% this year. All caps on investment quotas on a net-buy basis were abolished in August 2016.
"I believe mainland investors were still in the early process of building their offshore portfolio," said Linus Yip Sheung-chi, chief strategist at local brokerage First Shanghai Securities. "That means they will continue to buy and hold [Hong Kong-listed stocks]."
Global bank HSBC Holdings was the top share held by mainland investors, followed by dual-listed China Construction Bank and Industrial & Commercial Bank of China. The two state-owned lenders were traded at discounts of 15-20% in Hong Kong against their mainland listings, which partly explained their allure to mainland investors.
Internet player Tencent Holdings ranked fourth. Its shares breached HK$400 on Nov. 17 thanks to a 69% jump in quarterly net profit reported on Nov. 15.
"[Mainland Chinese] use WeChat every day and yet could not buy [WeChat app owner Tencent's] stocks at home. Surely they will be eager to buy its stocks in Hong Kong given the chance," Yip said.
Though the Shanghai-Hong Kong portion of the link has always produced stronger flows heading southbound, this trading pattern has been overturned on the Shenzhen-Hong Kong leg.
"Shenzhen hosts more new-economy stocks," said Will Leung Chun-fai, head of investment strategy at the wealth management unit of Standard Chartered Hong Kong. "They are more exciting and subject to higher volatility" compared with the big-cap, traditional industry offerings dominating the Shanghai market.
Hangzhou Hikvision Digital Technology, a video surveillance products supplier, was the most popular Shenzhen listing among overseas investors. Guangdong-based electrical appliances manufacturer Midea Group ranked second, followed by air conditioner maker Gree Electric Appliances.
Liquor producer Kweichow Moutai, seen as a bet on China's rising domestic consumption, is the most foreign-owned Shanghai listing.
Mainland investors held around HK$808.8 billion worth of shares in Hong Kong through the trading scheme, representing 2.5% of the Hong Kong market's total capitalization. But overseas investors held less than 0.1% of both the Shanghai and Shenzhen markets.
The imbalance also was apparent in the price gap between A-shares and their equivalent H-shares, which has widened over 31% since the inception of the trade links, and 5.6% year to date. H-shares are stocks of mainland companies that are listed on the Hong Kong exchange.
Leung said investors were not interested in arbitraging A- and H-shares at the moment given other opportunities. "Investors might start looking at the arbitrage trade again if the price gap widened to above 40%," Leung said.
The trading scheme, covering over 2,400 equities -- 900 in Shanghai, 1,000 in Shenzhen and 500 in Hong Kong -- was cited by index compiler MSCI as the key reason for the inclusion of A-shares into its benchmarks.