Chinese funds are snapping up shares in Hong Kong, betting that a link-up between the Shenzhen and Hong Kong stock exchanges, and easier access for institutional investors, will yield quick double-digit or even triple-digit arbitrage profits. On Wednesday, Chinese investors used the entire 10.5 billion yuan ($1.69 billion) daily investment quota for buying Hong Kong stocks under the Shanghai-Hong Kong Stock Connect scheme for the first time. This propelled the Hang Seng China Enterprises Index up 5.8 percent, following a 6.43 percent gain last week, and helped the Hong Kong exchange reach record volume on Wednesday.
China's CSI 300 stock index of the largest listed companies in Shanghai and Shenzhen has soared 91.3% y/y while the Hong Kong China Enterprises Index of 40 companies is up 36.8% over the same period. The broader Shanghai A-Shares index of around 1,000 companies is up 67.0% since mid-November 2014, when the PBOC started cutting interest rates to boost economic growth. The China MSCI includes 138 companies and recently joined the circus with a gain of 10.1% just last week.
Nevertheless, the China MSCI forward P/E remains relatively cheap. It was just 10.3 at the start of April. On the other hand, this composite’s Net Earnings Revisions Index was -3.9 during March, the 14th consecutive monthly negative reading. Furthermore, both forward revenues and forward earnings remain below last year’s record highs.
The Reuters story cited above also noted:
In the past, arbitrage opportunities proved a mirage. The Shanghai-Hong Kong stock connect not only failed to narrow the premium after its November launch but actually widened it as Chinese retail investors declined to move money south. But this time may be different. In late March, China's securities regulator improved access, letting mainland mutual funds invest in Hong Kong shares via the connector. Several days later, China allowed insurers to buy shares listed on GEM.
The 4/10 FT reported:
After years of poor performance, confidence in the stock market has returned in China with a vengeance. Savers have switched hundreds of billions of dollars out of property, deposits and wealth management products in the hope of making a fast buck in stocks. … Investors opened more than 4.8m new stock trading accounts in March alone and almost 1m more in the first two days of April, according to the latest figures from the country’s main clearing house. These accounts largely represent new investors ….The explosive growth of margin lending, in which brokerages lend money to investors to play the markets, also suggests irrational exuberance. Margin loans outstanding in Shanghai and Shenzhen--home to China’s two stock exchanges--totaled Rmb2.2tn ($358bn) on Wednesday, two-and-a-half times the total six months earlier.
Today's Morning Briefing: The Greatest Show on Earth. (1) A day at the circus. (2) Honorary member of Crudele’s rig club. (3) Send in the clowns. (4) Cecil B. DeMille on central banks. (5) Dudley’s Put. (6) What’s the difference between the “wealth effect” and asset bubbles? (7) Removing the safety net in China’s high-flying stock market. (8) Draghi sends EMU stocks into orbit. (9) Lots of cotton candy in the capital markets. (10) The Down Under controversy. (11) Are analysts underestimating EMU earnings? (12) “Woman in Gold” (+ +). 