The Chinese government’s unexpected announcement in August that mainland Chinese investors would be allowed to access Hong Kong’s stock market without restriction sent the Hang Seng index through the roof.
While China’s capital account has remained closed, restrictions on individual remittances overseas mean that burgeoning Chinese savings have been largely stuck in low-interest-bearing deposit accounts. What international portfolio investment has been made hitherto has largely been in the form of the somewhat anaemic qualified domestic institutional investor scheme.
The stock-starved individual Chinese investor is now unleashed on Hong Kong and hungry for assets. And since it is expected that the new scheme will eventually be opened to all investment markets, excited analysts have begun talking of a "China bid" that will push asset prices globally to hitherto unprecedented levels.
What happens in practice might be quite different. Certainly, domestic Chinese investors are likely to try their luck in Hong Kong. A local market increasingly dominated by mainland stocks, mainly banks, oil and technology companies, and now accounting for more than 42% of the index by weighting, gives Hong Kong an increasingly Chinese feel. And the valuation differential between Hong Kong-listed ‘H’ shares and mainland-listed ‘A’ shares in the same companies has fuelled speculation that mainland investors will quickly eradicate this so-called arbitrage.