Hong Kong’s $1.9 Trillion Stocks Await Boost From Yuan Trading

(Bloomberg) — Hong Kong is betting that a new program allowing investors to trade equities in the yuan on top of its local currency will help revive its flagging stock market and boost turnover that’s hovering at a four-year low.

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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 yuan, including Tencent Holdings Ltd., Alibaba Group Holding Ltd. and China Mobile Ltd. There are 24 companies on the list with a combined market value equivalent to $1.9 trillion, or more than a third of the city’s total.

The initiative holds a lot of promise: it can draw more buyers by minimizing exchange-rate risk and solidify the yuan’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 this month thanks to hopes of new stimulus measures.

“As investors, we don’t like our portfolios to be exposed to foreign-exchange risks,” said Ding Wenjie, investment strategist at China Asset Management Co., one of the nation’s largest fund houses. “Chinese investors will have the incentive to buy yuan-denominated shares in Hong Kong to get rid of that. To some extent, it will attract more investors and will boost turnover in the Hong Kong market.”

The scheme will only be available to offshore funds during the initial phase, and 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% of Hong Kong’s daily total, data compiled by Bloomberg show.

“The move reflects China’s efforts to continue to broaden and deepen its capital markets, as part of capital market reform,” said 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 damped sentiment.

The city’s average daily stock turnover has fallen to HK$116 billion so far this year, the lowest since 2019.

Weak Reception

But, there’s 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 yuan. Only one company adopted the scheme: Shenzhen Investment Holdings Bay Area Development Co.

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

Hong Kong Studies Boosting Yuan-Denominated Stocks on Bourse (2)

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 are expected to join the market to improve both the turnover and volatility,” said Xiancheng Zhao, portfolio manager at Bosera Asset Management Co. “That’s going to help the valuation recovery and narrow the gap between shares trading in China and the city.”

–With assistance from Kiuyan Wong and Mengchen Lu.