Chinese purchases of Hong Kong stocks through a planned exchange link may exceed estimates as individual investors buy casino and technology shares unavailable in Shanghai, according to Goldman Sachs Group Inc.
The link will give wealthy mainland investors access to 266 stocks traded in Hong Kong, including Galaxy Entertainment Group Ltd. and Tencent Holdings Ltd. China currently limits most overseas share investments to those made through asset managers.
“We might be surprised by retail participation once the stock connect is launched, given mainland investors’ preference to invest and trade themselves instead of buying mutual funds,” Christina Ma, the head of Goldman’s cash trading, equities in Asia Pacific ex-Japan, said in an interview in Hong Kong on Sept. 15.
Goldman’s view follows a CLSA Ltd. survey last month showing 77 percent of mainland investors don’t plan to participate in the bourse link, turned off by rules on the minimum account size and the exclusion of small-cap stocks. China, the biggest emerging economy, is counting on a successful exchange link to help liberalize its financial system, increase the role of the yuan and give its citizens more investment channels amid a slumping property market and increased risks from local wealth-management products.
Tencent, Asia’s biggest listed Internet company, and Galaxy Entertainment, the Macau casino operator founded by billionaire Lui Che-woo, have more than tripled in the past three years, making them the best performers on Hong Kong’s benchmark Hang Seng Index. The gauge rose 24 percent in the period through Tuesday, compared with a 7.5 percent drop in the Shanghai Composite Index.
Under the link with Hong Kong announced on April 10 and scheduled to begin next month, mainland investors with at least 500,000 yuan ($81,350) in their stock accounts will gain access to stocks traded on the Hang Seng Composite large and mid-cap indexes.
The connect will also include dual-listed companies, which traded at a premium of about 4 percent in Hong Kong over the mainland through yesterday, versus a 44 percent discount at the end of 2007, according to the Hang Seng China AH Premium index. Anhui Conch Cement Co., China’s biggest producer of the building material, was 25 percent more expensive in Hong Kong than Shanghai yesterday, while the premium for China Life Insurance Co., the largest insurer, was 17 percent.
The Hang Seng measure closed 1 percent higher, while the Shanghai gauge added 0.5 percent. The AH Premium index fell 1 percent to 94.95, signaling a wider discount on mainland shares.
Overseas investments by Chinese citizens through the Qualified Domestic Institutional Investor program have dwindled as the funds posted losses. Assets in QDII funds dropped to 53 billion yuan at the end of the second quarter, the lowest level since 2011, according to Shanghai-based research firm Z-Ben Advisors Ltd.
The first four QDII funds — Harvest Oversea Investment Fund, China AMC Global Equity Select Fund, China Southern International Selection Allocation Fund and CIFM Asia-Pacific Advantage Fund — lost between 10 and 30 percent from their inception in late 2007 through last week, according to data compiled by Bloomberg. That compares with a gain of about 7 percent for the MSCI World Index.
“Over 80 percent of the stock market investors in China are retail,” Ma said. “They are used to trading themselves and would be excited about the ability to pick stocks and trade single names in Hong Kong.”
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