Having crossed the 21,000-point threshold on May 7 thanks to positive vibes over a government land auction, the Hang Seng Index (HSI) received a further boost a week later as Beijing permitted domestic banks to invest more funds in Hong Kong stocks.
The new rules, which allow Qualified Domestic Institutional Investors (QDII) to invest as much as half their funds in equities and funds endorsed by Hong Kong regulators, sent the HSI up 511.03 points to 20,979.29 on May 14. It was the market’s busiest ever trading day.
The QDII liberalization was widely viewed as a move to encourage capital outflows from the Chinese economy. It means there is now US$7.25 billion that can be invested offshore and Deutsche Bank estimates that a total US$10 billion will leave the country over the next 12 months.
What’s more, it gives foreign fund managers the opportunity to target the Chinese wealth management market without setting up a joint venture with a domestic partner.
The mainland market itself continued its record-breaking run, with the Shanghai Composite Index (SCI) passing 4,000 points.
On May 9, the combined turnover of the Shanghai and Shenzhen bourses came to US$49 billion. Not only was this 21% higher than the previous record set at the end of April, it was also higher than the turnover for the rest of Asia combined. Six months ago, trade in China was only about US$5 billion per day.
With price-to-earnings ratios up to 50 times compared to the Asian average of 14-18 times, talk of tougher government action is rife.
Zhou Xiaochuan, governor of the People’s Bank of China, has expressed concern about a stock market bubble and the China Securities Regulatory Commission publicly warned mutual fund managers to reduce speculation.
The market responded by dropping 3.6%.
China’s National Social Security Fund announced at the end of April that it was cutting its exposure to A-shares from 39% to 30%, saying that the market "has been rallying too long."
However, four out of six economists advising the State Council came out against using measures – for example, the implementation of capital gains tax on stock sales – to induce cooling.