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Hong Kong stocks are at their cheapest relative to mainland Chinese equities in two years as Citic Securities predicts 20 per cent gain

Zhang Shidong in Shanghaishidong.zhang@scmp.com

The global coronavirus pandemic has sent Hong Kong stocks to their cheapest level relative to Chinese equities in two years, a price gap that Citic Securities says may spur a 20 per cent gain in the city's shares.

A gauge tracking the price discrepancy between the two markets showed that Chinese companies trading in Hong Kong traded at discounts of up to 27 per cent to their onshore counterparts this month. That is the widest gap since February 2018.

Citic Securities, the mainland's biggest listed brokerage, said the divergence would create a good opportunity to "buy the dip" " buy shares at their cheapest level in expectation of a rise. Citic believes Hong Kong stocks will climb at least 20 per cent once the Covid-19 epidemic fades.

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Mainland Chinese traders have already been increasing their holdings of the stocks, even as the Hang Seng Index entered bear market territory this month for the first time since 2015, after declining 20 per cent from a high in April.

"The decline of Hong Kong stocks, an offshore market, was caused more by the global liquidity squeeze," said Yang Lingxiu, a strategist at Citic. "After the quick, sharp drop, the market now has a long-term safety margin. Chinese stocks are expected to attract overseas investors first, with the epidemic in China under control, resumption of factory production and a drop in interest rates."

He recommends Hong Kong-traded Chinese companies, including internet giant Tencent Holdings, coal producer China Shenhua Energy and property developer Sunac China Holdings.

Hong Kong's market, the third largest in Asia, is more vulnerable to swings in overseas stocks than the mainland markets, whose restrictions on foreign buying partially shield it from the global rout that has swept almost every asset class. The Shanghai Composite Index remains the only major benchmark in the world that has not slipped into a bear market.

Mainland investors have been loading up on Hong Kong stocks through the exchange link programme, betting that the battered shares have troughed. They have spent 136 billion yuan (US$19.2 billion) buying them this month, with daily net purchases reaching a record 14.7 billion yuan on March 13.

Analyst who made correct call on stocks is cautious as regulator talks up market

Meanwhile, overseas investors have been pulling out of mainland-traded stocks amid the widening price discrepancy. Global fund managers have sold a combined 46.9 billion yuan of the shares in March, turning them into net sellers since the global spread of Covid-19 began to roil financial markets across the world.

Of the 119 Chinese companies with dual listings, all the mainland-traded shares are pricier than those trading in Hong Kong. Luoyang Glass and auto part maker Zhejiang Shibao register the biggest premiums, exceeding 500 per cent, while the price gaps of Ping An Insurance Group and Bank of Qingdao are the smallest, less than 3 per cent.

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 © 2020 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2020. South China Morning Post Publishers Ltd. All rights reserved.