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China's mutual funds, armed with cash from Ant Group's foiled IPO, plough into Tencent, HKEX and other Hong Kong-listed stocks

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Zhang Shidong in Shanghai shidong.zhang@scmp.com
·5 min read
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Five Chinese mutual funds, armed to the teeth after their plans to invest in the world's largest stock sale were foiled, have deployed a new strategy to soothe investors: plough their US$6.2 billion of dry powder capital into Hong Kong's stocks.

The strategy to invest in some of Asia's cheapest stocks appeared to have paid off, as Hong Kong's benchmark Hang Seng Index recovered beyond its pre-pandemic level last week to close in on 30,000 points, a level not seen since May 2019. Zhong Ou Innovation Future Fund has returned 23 per cent since October to investors, while the worst performer of the five returned 6.1 per cent, according to data on their websites.

The rush of capital into Hong Kong explains why the city's stock market is riding a 20-month high, even as the local economy remains mired in its worst recession on record, with joblessness poised to jump to a multi-year high amid the raging coronavirus pandemic. Southbound capital, or funds that flow into Hong Kong via two cross-border investment channels called the Connect scheme with the Shanghai and Shenzhen bourses, has risen to successive daily records this week.

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"The rally can be sustained as capital flows from the mainland show no signs of slowing down," said Kenny Tang Sing-hing, co-founder and chief executive of Royston Securities in Hong Kong. "Mainland investors may want to boost the capitalisation of Hong Kong's stock market. Chinese enterprises won't want to list in the US for safety reasons, so the market capitalisation here needs to be sufficiently big and deep enough in order to attract and absorb [the listing of] large Chinese companies."

The five funds were established last October for unit holders to invest in Ant Group's US$35 billion dual listing on the Shanghai and Hong Kong exchanges. Each of the five funds raised 12 billion yuan (US$1.9 billion) within days, pledging up to 10 per cent of the capital to bid for Ant Group's shares.

The IPO was suspended 48 hours before shares were due to begin trading, foiled by regulators amid a rush of new rules to prevent risk from China's fintech industry from spilling over into the broader banking system.

Aggrieved investors pulled their funds, causing the combined size of the five funds to shrink by almost a third to 40 billion yuan. The five funds are under the management of China Universal Asset Management, E Fund Management, China Asset Management, Penghua Fund Management and Zhong Ou Asset Management.

Ant Group's IPO halt leaves five mutual funds with US$9 billion in limbo, as potential first-day trading bonanza goes poof

Hong Kong-listed Chinese technology stocks were particularly sought after, as they provide the only way for mainland investors to partake in the growth of China's home-grown champions, according to the portfolios disclosed by four out of the five asset management firms.

Tencent Holdings, China's largest games publisher, was the top holding for Zhong Ou, E Fund and China Universal, ranking number two among Penghua's investments as of January 14. Meituan the food delivery giant, Xiaomi the smartphone maker and Sunny Optical Technology Group, the producer of components for Apple's iPhones, were also among the funds' top 10 holdings.

Tencent is now the world's sixth-largest company with a market cap of US$810 billion. Hong Kong Exchanges and Clearing, which is the world's largest bourse operator, capitalised at US$82 billion, is also among these funds' favourites.

"Technology and traditional sectors both have big weightings in Hong Kong's market," said Yin Yue, an analyst at Yuekai Securities. "Traditional sectors such as financials and automakers are expected to enjoy increases in both earnings and valuations amid the global recovery."

Buying by the five funds has contributed to the HK$205.6 billion (US$26.5 billion) poured into Hong Kong's stock market so far this year by mainland investors, including HK$20.3 billion on Wednesday. They amoounted to almost 25 per cent of the net inflows for the whole of 2020.

As much as 600 billion yuan of capital could flow into Hong Kong's stocks from mainland China in the coming years, according to a forecast by the country's largest investment bank, China International Capital Corporation (CICC), because of the local market's low valuation and the familiarity it offers to Chinese investors.

Buying interest accelerated in January, as the funds were attracted by Hong Kong's low valuations. Among the Chinese stocks that are dual-listed on the mainland and in Hong Kong, China's yuan-denominated A shares were 34 per cent more expensive on average than their Hong Kong counterparts, according to a gauge tracking the price discrepancy between the two groups.

Additional reporting by Martin Choi

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2021 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2021. South China Morning Post Publishers Ltd. All rights reserved.