Hong Kong’s $1.9 trillion shares await boost from yuan trade

(Bloomberg) — Hong Kong is betting that a new program that allows investors to trade shares in yuan alongside the local currency will help revive the flagging stock market and boost sales, which are at a four-year low.

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The exchange on Monday rolled out the so-called HKD-RMB dual-counter model to give traders a chance to buy and sell some of the financial hub's largest listed stocks in yuan, including Tencent Holdings Ltd. and Alibaba Group Holding Ltd. and China Mobile Ltd. The list includes 24 companies with a combined market value equivalent to $1.9 trillion, more than a third of the city's total value.

The initiative shows promise: by minimizing exchange rate risk, it can attract more buyers and cement the yuan's growing status as an international currency. The capital inflow could also be the next catalyst for Hong Kong stocks, helping to extend the rally this month on hopes of fresh stimulus measures.

“As investors, we don't want our portfolios to be exposed to exchange rate risk,” said Ding Wenjie, investment strategist at China Asset Management Co., one of the country's largest fund houses. “Chinese investors will have an incentive to buy yuan-denominated stocks in Hong Kong to get rid of that. In a way, it will attract more investors and increase sales in the Hong Kong market.”

The program is initially only available to offshore funds and the authorities plan to expand it to onshore investors via the southbound trade link at a later date.

If successful, the dual counter will trigger a fresh wave of mainland cash into Hong Kong stocks. Onshore investors are increasingly represented in the city's stock market, with their turnover through the trading links accounting for more than 26% of Hong Kong's total daily turnover, data compiled by Bloomberg shows.

“The move reflects China's efforts to further expand and deepen its capital markets as part of capital market reform,” said Elizabeth Kwik, investment director for Asian equities at abrdn. “While we believe this should increase market liquidity in Hong Kong, market sentiment is something else entirely and most likely still dependent on macroeconomic and political concerns.”

Some investors are hoping the counter will help revitalize the longer-term prospects of the benchmark Hang Seng index, which despite its recent rally this quarter is still underperforming most global equity indicators. Investors have pulled out of Hong Kong equities as Chinese economic growth slowed and geopolitical risks dampened sentiment.

The city's average daily inventory turnover has fallen to HK$116 billion so far this year, the lowest since 2019.

Poor reception

There is reason for caution, however, as the city's experiment with a similar model in 2012 was unsuccessful. At that time, the “dual tranche, dual counter” system was introduced to allow an issuer to offer and list shares in both Hong Kong dollars and yuan. Only one company has adopted the program: Shenzhen Investment Holdings Bay Area Development Co.

“Progress was unsatisfactory due to inactive cross-border transactions and a market mechanism that was not fully developed at the time,” analysts at HSBC Holdings Plc, including Raymond Liu, wrote in a June 7 report, referring to the old model. “Turnover was poor and RMB meter performance was poor.”

Hong Kong studies favor yuan-denominated stocks on the stock exchange (2)

Some investors think the initiative could do better this time around, which could help the broader market rally.

“As it becomes more convenient to invest in Hong Kong stocks, more Chinese capital is expected to enter the market to improve both turnover and volatility,” said Xiancheng Zhao, portfolio manager at Bosera Asset Management Co. “The will help the valuation.” “We will recover and narrow the gap between China's stock trading and the city.”

– With the support of Kiuyan Wong and Mengchen Lu.

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