Chinese investment flows are set to boost Hong Kong financial markets, Hong Kong Monetary Authority governor Joseph Yam has told Emerging Markets. But analysts warned that the surge of new money could prove volatile and unpredictable.
China’s State Administration of Foreign Exchange announced this week that Chinese nationals who have a Bank of China Ltd. account in Tianjin can invest an unlimited amount of foreign currency in Hong Kong stocks in a pilot program. Analysts expect this program will be gradually rolled out to the rest of the country as an official policy measure.
Speaking before this policy announcement, Hong Kong’s monetary policy chief Joesph Yam told Emerging Markets that the city was developing a new role as a facilitator for China to export capital. “In the past, Hong Kong as an international financial centre had focused on channelling overseas funds into China. But now we must move with the times and place ourselves with China’s economic and financial development, serving the country’s needs in financial intermediation,” said Yam. (For a full interview, please click here)
The Hang Seng Index recorded its biggest two-day gain in six years on Monday and Tuesday, on the expectation that an avalanche of cash will soon be unleashed by Chinese households, which have an estimated 17 trillion yuan ($2.2 trillion) in savings.
Yam said he was working with the Chinese authorities towards creating an “efficient price-discovery mechanism” for dual-listed shares in Shanghai and Hong Kong. This would avoid excess arbitrage based on price differences between the two bourses.
Grace Ng, greater China economist at JP Morgan, agreed that Chinese capital account liberalisation would help normalise the relationship between prices on the two stock exchanges. “As the pilot scheme gains momentum, the premium that mainland-listed shares command over their Hong Kong counterparts will narrow,” Ng told Emerging Markets.
She also expects more Asian-based companies to list on the city’s bourse, the Hang Seng, to tap into the Chinese retail investor base. But Ng is concerned that the changes will also affect market behaviour in Hong Kong in less positive ways.
“Hong Kong will now be seen as mainly a Chinese play for international investors. As a result, it will be subject to more sensitivity if there are policy changes in China, as well as being affected by the untested sentiment of Chinese retail investors,” said Ng.
Kelvin Lau, economist at Standard Chartered, echoed the warning that Hong Kong faces serious risks as a platform to monitor the capital flow effects of China’s capital account liberalisation. He is worried that as a highly open market-economy, combined with the limitless amount Chinese individuals may invest, could cause Hong Kong’s stock market to witness asset price inflation and unpredictable investor behaviour.
“Will Chinese investors see the city as a safe haven for investment or a site of diversification? If A-shares [in China] fall will people then go to Hong Kong? Given the projected flood of cash, this will be immensely difficult for policymakers to predict and handle,” Lau told Emerging Markets.