Hong Kong’s $2.5 trillion stocks await boost from renminbi trading

Hong Kong - Hong Kong is betting that a new programme allowing investors to trade equities in renminbi on top of its local currency will help revive its flagging stock market and boost turnover that is hovering at a four-year low.

The stock exchange is rolling out the so-called HKD-RMB Dual Counter Model on Monday to give traders the option to buy and sell some of the financial hub’s biggest-listed stocks using the renminbi, including Tencent Holdings, Alibaba Group Holding and China Mobile.

There are 24 companies on the list with a combined market value equivalent to US$1.9 trillion (S$2.5 trillion), or more than a third of the city’s total.

The initiative holds a lot of promise: It can draw more buyers by minimising exchange rate risk and solidify the renminbi’s growing status as an international currency.

The influx of capital may also provide the next catalyst for Hong Kong shares, helping extend a rally in June thanks to hopes of new stimulus measures.

“As investors, we don’t like our portfolios to be exposed to foreign-exchange risks,” said Dr Ding Wenjie, investment strategist at China Asset Management, one of the nation’s largest fund houses.

“Chinese investors will have the incentive to buy renminbi-denominated shares in Hong Kong to get rid of that,” she said. “To some extent, it will attract more investors and will boost turnover in the Hong Kong market.”

The scheme will be available only to offshore funds during the initial phase, and the authorities plan to extend it to mainland investors through the southbound trading link at a later stage.

If successful, the dual counter will unleash a new wave of mainland cash onto Hong Kong shares.

Onshore investors have a growing presence in the city’s stock market, with their turnover on the trading links accounting for more than 26 per cent of Hong Kong’s daily total, data compiled by Bloomberg shows.

“The move reflects China’s efforts to continue to broaden and deepen its capital markets, as part of capital market reform,” said Ms Elizabeth Kwik, investment director of Asian equities at abrdn. “While we think it is likely to boost Hong Kong market liquidity, market sentiment is a different thing altogether and most likely still captive to macro and policy concerns.”

Some investors hope the counter will help to revive the longer-term prospects of the benchmark Hang Seng Index, which despite its recent rally is still trailing most stock gauges worldwide this quarter.

Investors have retreated from Hong Kong equities as Chinese economic growth lost momentum and geopolitical risks dampened sentiment.

The dual counter’s launch comes as Beijing is stepping up efforts to shore up growth.

The authorities are said to be considering a broad package of stimulus measures after lowering a short-term policy interest rate last week.

China must adopt “more forceful” measures to support the economic recovery, state television reported on Friday, citing a State Council meeting chaired by Premier Li Qiang.

The city’s average daily stock turnover has fallen to HK$116 billion (S$19.9 billion) so far in 2023, the lowest since 2019.

Weak reception

But, there is reason to be cautious, given the city’s experiment with a similar model in 2012 failed to take off.

Back then, the “dual tranche, dual counter” system was introduced to give an issuer the option to offer and list shares in both the Hong Kong dollar and the renminbi.

Only one company adopted the scheme: Shenzhen Investment Holdings Bay Area Development.

“Progress was not satisfactory due to inactive cross-border transactions and a not-fully developed market mechanism at that time,” HSBC Holdings analysts wrote in a June 7 report, referring to the old model. “Turnover was lacklustre and the performance of the RMB counter was poor.”

Some investors say the initiative may fare better this time, helping fuel a recovery in the broader market.

“As it becomes more convenient to invest in Hong Kong stocks, more Chinese capital is expected to join the market to improve both the turnover and volatility,” said Bosera Asset Management portfolio manager Zhao Xiancheng. “That’s going to help the valuation recovery and narrow the gap between shares trading in China and the city.” BLOOMBERG