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A strange thing is happening in Hong Hong’s publicly traded Chinese stocks.
Chinese banks, roundly shunned by global investors, are winning the popularity contest among mainland investors buying through the Shenzhen-Hong Kong and Shanghai-Hong Kong stock connects.
According to Goldman Sachs Group Inc., daily purchases of Hong Kong shares via the two links are up 41 percent this year, with mainland investors pouring a net $7 billion into the city. That’s helped offset $1 billion of outflows from active investors, and is well above the $1.6 billion of ETF inflows Hong Kong has witnessed since January. Since the inception of the first stock connect in November 2014, a total of $57 billion of southbound net buying has been recorded, compared with $30 billion for northbound.
Star recipients have been high-dividend-paying lenders including China Construction Bank Corp., Industrial & Commercial Bank of China Ltd., Bank of China Ltd. and even the Hong Kong-listed stock of HSBC Holdings Plc. China Construction Bank, ICBC and HSBC alone have soaked up almost $16 billion of mainland money.
That flood of funds into Chinese financial institutions isn’t entirely rational. Banks on the mainland remain dogged by bad debt worries and haven’t benefited from the improved sentiment that’s buoyed their U.S. counterparts as President Donald Trump boosts consumer confidence and awakens animal spirits.
China Construction Bank’s Hong Kong-traded stock has 22 buy ratings, four holds and zero sells, according to data compiled by Bloomberg. But many of those rosy calls are based on expectations of further momentum-driven gains. Outside of China Merchants Bank Co. and Postal Savings Bank of China Co., the nation’s largest lenders trade at a discount to book value, implying a degree of investor skepticism
about the value of their assets and
specifically their high levels of
nonperforming loans.
If the logic is to buy cheap and arbitrage the difference between Shanghai A shares and Hong Kong H shares, then something’s amiss. PetroChina Co., for example, trades at a much higher premium in Shanghai than in Hong Kong, and yet interest from mainland investors is much lower.
To be fair, some of those discounts have narrowed as buying of banks’ H shares heats up. And HSBC is less exposed to China, so it could be argued that here at least is a diversification play for yuan-focused investors, despite the lender’s weak growth outlook.
With an increasing number of mutual funds and insurers getting approval to invest in offshore stock markets and fewer investment avenues available after Beijing clamped down on capital outflows, the love affair with Chinese bank shares in Hong Kong is unlikely to end soon. If you’re willing to gloss over the fundamentals, it’s not a bad place to be.
—Bloomberg