By the market close on April 9, turnover on the southbound channel of the Shanghai-Hong Kong Stock Connect had exceeded the record of Rmb16.8bn ($2.7bn) set on April 8, reaching Rmb26bn. The net daily usage limit of Rmb10.5bn was also exhausted. There are fat profits to be had for H-share investors, now that the Hang Seng Index has reached its highest level since 2007. But the bull run raises a question: what does this frenzy really mean?
From a short term perspective, the explosive increase in mainland interest in H-shares has been explained through a combination of factors. On one hand, Chinese regulators have manifested their intention of making the Stock Connect more than a mere one-way success by encouraging domestic buyers to hop on the Hong Kong-bound Through Train, as the programme is also known.
This came, specifically, in the form of an article in the state-controlled China Securities Journal which, as ING economist Tim Condon noted in an April 9 report, brazenly titled a piece “Go! Buy Hong Kong Stocks!” So much for subtlety.
The other underlying factor is that, with A-shares trading at a 30% premium to their H-share counterparts before the Easter break, there are plenty of obvious arbitrage opportunities for mainland investors waiting to be equalised. As of April 9 that premium had closed slightly, to 23.7%, according to CEIC data, but it was far from gone.
Another more worrying explanation is that the massive surge in the domestic stock market may be starting to induce even in China's traditionally momentum-driven investors some doubts about how high and how far the Shanghai Composite Index can really go.
One need look no further than how the Northbound channel has performed in the last day and half. In a word, it has been pathetic.
On April 8, the northbound quota closed effectively in the negative, at Rmb16.5bn, higher than the opening quota of Rmb13bn. Selling of A-shares beat purchases by almost Rmb4bn. On April 9, it was even worse, with the quota closing at Rmb17.9bn and sell orders beating purchases by Rmb5bn.
The real takeaway probably lies not so much in stock market performance and the prospects for the Stock Connect, however. What should really be drawn from these eventful post-Easter trading sessions is that this is just a taste of what the much-expected China opening will really look like. The Hang Seng Index reaching a seven-year high after just one day of full usage of the southbound quota is a reminder of how even a tiny movement in Chinese capital can rock one of the biggest stock markets in the world.
After all, the record Rmb16.8bn southbound turnover traded on April 8 represented just 5% of the average daily turnover recorded throughout the whole of 2014 in the Chinese stock market. As of February 2015, the annualised average daily turnover had ballooned to around $100bn, according to data from the World Federation of Exchanges, shrinking that proportion to just 2.7%.
And it doesn’t end there. Charles Li, head of the Hong Kong exchange, was reported on April 10 as expecting a substantial expansion of the quota — although no timeline has been set.
A variety of factors are helping to make China investors ready to meet the world. Is the world ready to meet China?