Hong Kong shares soar as mainland China investors buy in

The new system that connects stock markets in mainland China and Hong Kong is creating a buying frenzy in Hong Kong’s Hang Seng index as Shanghai-based investors look south in search of values. For the second straight session, shares in Hang Seng rallied sharply, driven by a torrent of cash pouring into Hong Kong stocks from mainland China investors. It was also the second consecutive day that investors from mainland China used up their entire daily “quota” of funds that can flow south to the Hong Kong exchange, according to Bespoke Investment Group.AFP 539542057 I MAX CHN -

A day after the Hang Seng rallied nearly 4%, the main stock index in Hong Kong gyrated wildly, shooting up as much as 6.4% in early trading before giving back a good chunk of those gains and finishing Thursday’s session up 707.53 points, or 2.7%, at 26,944.39. So far in April, the Hang Seng is up more than 8%, extending its full-year gains to 14.1%. Driving the gains: an influx of capital from mainland China investors made possible by a six-month-old policy change that connects investors in Shanghai with Hong Kong.

Back in November, the Shanghai-Hong Kong Stock Connect was created to allow capital to flow more freely between mainland China and Hong Kong. And in March market regulators extended the program, which was at first restricted to wealthy investors, to include mutual funds, which created additional demand for shares listed in Hong Kong. In the earlier phases of the “connect,” more money flowed into mainland China shares, as it marked an opening up of that market to investors that had previously been unable to gain exposure to stocks trading in Shanghai. However, cash is now heading south and back to Hong Kong, according to Bespoke.

“Another big day in Hong Kong (as) the massive raft of capital that’s worked its way into the onshore Chinese stock market is now turning south,” Bespoke told clients in a Thursday morning research note. Savvy investors in mainland China are snapping up shares listed on the Hong Kong exchange. One reason for the massive flow of cash into Hong Kong in recent days is the fact that the Shanghai Composite Index has been rallying sharply, with a 22.3% gain this year, making shares more pricey than in Hong Kong.

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