Mainland investors turn sellers via HK stock link

Central bank's surprise interest rate cut said to be influencing decisions

Mainland investors turned net sellers of Hong Kong stocks through Stock Connect for the first time on Monday, after taking up just 6.1 percent of daily buying quotas in the program's first week.

The balance for the daily limit on Hong Kong equity-buying through the link rose above 10.5 billion yuan ($1.7 billion) in morning trade, signaling that more investors were selling than buying, according to data compiled by Bloomberg.

About 36 percent of the daily allowance for Shanghai purchases was used up by afternoon. The Hang Seng China Enterprises Index soared 3.6 percent in Hong Kong, outpacing a 1.9 percent gain by Shanghai's benchmark gauge, after China unexpectedly cut interest rates on Friday.

"Mainland investors are taking profits," said Alex Wong, Hong Kong-based asset-management director at Ample Capital Ltd, which oversees about $150 million. "The difference is in investor behavior. In Shanghai people tend to exit on highs after policy announcements, whereas in Hong Kong, people are not short term."

The quota used by mainland investors in Hong Kong has dwindled every day since the link's debut a week ago. Some mainland investors do not have approvals needed to invest offshore, there are not many arbitrage opportunities for them to exploit, and small-cap stocks, which they favor, were not included in the program, Charles Li, Hong Kong Exchanges & Clearing Ltd's chief executive officer, wrote on his blog over the weekend as he cited reasons for the slow start.

"We all shared in the collective enthusiasm prior to launch, so when we see the volume drop we're obviously a bit disappointed," he wrote. "This is a long-term scheme and we shouldn't get too hung up on the initial numbers."

China is counting on the link to help open up its capital account, boost local equity valuations and increase global use of the yuan. For Hong Kong, the program is part of the city's effort to cement its status as a financial gateway to the biggest emerging market.

International investors sought to buy the maximum 13 billion yuan of Shanghai-listed shares permitted to them on Stock Connect's opening day.

After that, flows dwindled as concerns about execution risks and ownership of purchased assets deterred fund managers, according to Nick Ronalds, managing director for equities at the Asia Securities Industry & Financial Markets Association, a trade association for the biggest investors and brokers.

Daily quota usage in Shanghai has outweighed that in Hong Kong by at least six times since the link began.

Haitong Securities Co, garment company Bosideng International Holdings Ltd and Internet giant Tencent Holdings Ltd were among the most actively traded Hong Kong stocks through the program last week, according to data from HKEx, which runs the Hong Kong exchange.

Stocks advanced on the mainland and in Hong Kong after China's surprise interest rate cut. One-year lending rate was reduced by 40 basis points to 5.6 percent while the one-year deposit rate was lowered by 25 bps to 2.75 percent.