HONG KONG (BLOOMBERG) - Hong Kong is becoming the new wild east as mainland investors increasingly target the city's stocks.
Swings in the Hang Seng China Enterprises Index are bigger than every other benchmark gauge in Asia, with a measure of volatility climbing to the highest levels relative to the Shanghai Composite Index in almost five years. Fluctuations increased in the past month as Hong Kong's equity market drew US$8.8 billion of net inflows from mainland investors via a link with Shanghai, the most since the channel opened almost two years ago.
While the size of the influx is small relative to the US$4.1 trillion market capitalization, increasing speculative trading in the world's fourth-largest stock market adds to the risks for institutional investors already trying to navigate a Chinese slowdown, Brexit and higher US borrowing costs. The inflows helped lift the Hang Seng China Enterprises up 10 per cent last quarter to be among Asia's best performers.
"There are some signs the H-share market characteristics have become more like A shares but there are still a lot of differences," said Daniel So, a strategist at CMB International Securities Ltd. in Hong Kong. "It's still dominated by international investors - mainland investors' trading accounts for a small portion of the total turnover."
A gauge of 30-day price swings on the Hang Seng China Enterprises climbed to 19.3 at the end of last week, compared with 16.2 for Japan's Topix index and 12.9 for the MSCI Asia Pacific Index.
Gyrations by the H-share gauge increased after it tumbled 4 per cent on Sept 12 from a nine-month high as mainland inflows waned. HSBC Holdings and Industrial & Commercial Bank of China, the two most traded through the link last month, have seen outsized swings.
More subdued trading in Hong Kong this week shows the increasing dependence on mainland inflows. Turnover fell to an almost three-month low on Monday with Chinese markets closed for holidays. The link will reopen on Oct 11. The 40-member gauge of H shares added 0.4 per cent at the noon-time break.
Volatility in the Hang Seng China Enterprises Index is still a fraction of the levels seen in the Shanghai Composite during its boom-to-bust last summer, and below peaks seen earlier this year.
China's domestic equity markets became the world's wildest in 2015 as investors unwound leveraged bullish bets and the government staged a drastic intervention to shore up stocks. While policy makers were unable to prevent a US$5 trillion rout, they've since succeeded in restoring stability - price swings on the Shanghai Composite are near the smallest on record as the gauge treads water.
Fluctuations on the Shanghai gauge will likely remain subdued as the government keeps monetary policy largely unchanged, said Daniel Morris, a senior investment strategist in London at BNP Paribas Investment Partners. "Normally the volatility on the domestic market is higher than the Hong Kong market."