Hang Seng turns a brighter shade of red
By Olivia Chung

HONG KONG - There are signs that the Hong Kong stock market is becoming increasingly Sinicized.

As Hong Kong's benchmark Hang Seng Index keeps setting record highs, foreign institutional investors are reducing their holdings in Hong Kong-listed mainland Chinese firms, thinking they are overvalued.

In the past, any significant selling by foreign institutional investors would cause share prices to dive and hence drive the market down. This time, however, it's quite the opposite. Share prices of giant Hong Kong-listed China firms dumped by international investors have quickly rebounded as mainland investors splurge on the shares.

As a result, analysts say mainland Chinese investors are gradually replacing foreign investors and becoming increasingly important players on the Hong Kong stock market. And as such, the Hong Kong market is becoming increasingly connected with the mainland markets, and less vulnerable to fluctuations in international markets.

Temasek Holdings Pte, the investment arm of the Singaporean government, recently raised HK$809.6 million by selling 37 million shares in China Cosco Holdings, the largest shipping conglomerate in China, according to recent filings with the Hong Kong stock exchange.

The sales enabled Temasek to pocket about HK$650 million in profit based on the HK$4.25 per share it paid during Cosco's initial public offering in June 2005.

Temasek's disposal was the most recent in a string of sales of shares traded in Hong Kong by international investors seeking to cash out from the rapid price hikes in China's biggest companies.

China Cosco shares have gained about 360% so far this year mainly on the success of its bulk-shipping acquisitions, outpacing a 33% rise in the benchmark Hang Seng Index.

Earlier, US-based strategic investor Alcoa joined American billionaire Warren Buffett in selling down holdings in Hong Kong-listed Chinese companies.

Alcoa International (Asia) Ltd, a wholly owned subsidiary of Alcoa, sold its entire holding in Aluminum Corp of China Ltd (Chalco) for about HK$15.3 billion at HK$17.34 per share. Alcoa had been a big investor in Chalco since its initial public offering in 2001, holding about 7% of its shares.

Buffet's listed flagship Berkshire Hathaway cut its stake in PetroChina, the mainland's largest oil producer, to 1.05% from 1.29% in the past two months for HK$1.59 billion.

Shares of PetroChina surged by about 25% 18 days after Buffet's latest sale of his holding in the oil giant, while Cosco rebounded 1.5% a day after it tumbled on Alcoa's sale of its shares in Chalco.

Analysts said investors in the Cosco stake were primarily China-invested securities firms such as Bank of China International, while sellers were foreign invested securities houses such as HSBC Brokering and UBS Investment Bank.

Analysts said the mainland investors have different a investment rationale than international investors.

Grace Liu, an analyst with Guotai Jun'an Securities Hong Kong, said it made sense for Buffett to sell his shares.

"The share price of PetroChina had grown by six times from more than four years ago when Mr Buffett bought the shares. Besides, PetroChina's H shares' price-earnings ratio outstripping peers, so it's sensible from his point of view for Mr Buffett to sell the shares," she said.

Based on Friday's close, PetroChina trades at 16.86 times this year's estimated earnings, compared with 13.6 times for ExxonMobil Corp and 10.7 times for Royal Dutch/Shell.

Another analyst at a Hong Kong private equity fund who asked for anonymity said while international investors such as Buffett usually judge a stock's value by comparing its price-to-earnings multiple with its peer group overseas and sell when they regard it as overvalued, mainland investors who are more familiar with with China's economic development chase such stocks based on whether they are a "dragon's head" of an industry.

Analysts said they expect the investment structure of Hong Kong stock market will continue to change gradually as more mainland funds flow into it, despite the international funds cashing out.

Hong Kong's benchmark index has rallied 33% since mainland announced the "through train" or "fund from the north" plan allowing individual mainland investors to invest in Hong Kong equity as of August 20. It's estimated that the plan will bring US$150 billion to the Hong Kong market in the next three years, or about 7% of the current market capitalization, said Thomas Deng, a Goldman Sachs economist.

Another plan, the qualified domestic institutional investor (QDII) plan, also became more popular after regulators widened the scope of mainland investments to include overseas stock markets.

Twenty-two banks have been granted licenses to invest up to US$16.1 billion abroad on behalf of mainland clients, and 14 of those have launched more than 30 QDII products.

A spokesman of Taifook Securities Group said that to serve mainland customers, the company is busy writing a book of Hong Kong-listed China firms for mainland investors sending its staff to cities such as Guangzhou, Shenzhen, Chengdu and Shanghai to give talks.

"As local firms are not allowed to sell products on the mainland, we have been holding seminars in a bid to promote our brand name in a low profile," he said.

Despite the restriction on mainlanders buying overseas shares, many mainland visitors have quietly opened accounts with Hong Kong securities houses. An official with a local brokerage house said about 2,000 new accounts were opened in his company respectively in April and May, with 30% of them opened by mainland investors, thanks to the May Day "golden week" national holiday.

The Taifook official said he expects more mainlanders to come to the territory to open investment accounts during this golden week, a seven-day holiday on the mainland in recognition of National Day (there are three golden weeks in China; the third marks the lunar new year in January or February). From June to September, more than 1,000 new accounts were opened each month.

Liu said mainland customers generally favor mainland companies that are listed in Hong Kong. They are known as H shares in Hong Kong and A shares on the mainland.

Joseph Tung, executive director of the Hong Kong Travel Industry Council, said there are travel agencies organizing tours during golden week to open H-share accounts in Hong Kong for potential mainland investors.

However, an analyst who asked not to be named said mainland funds has been flowing into Hong Kong for a long time.

Apart from the outflow of funds from China, the analyst attributed the record high of the Hang Seng Index to funds funneled by Europe and the Middle East, which are avoiding escalating risks from the subprime crisis in the United States and attracted by China's strong economic growth.

"The overseas funds have been rushing to Hong Kong to take advantage of the lower valuations of H-shares, too," she said.

Olivia Chung is a senior Asia Times Online reporter.

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