By Luoyan Liu and Andrew Galbraith
SHANGHAI (Reuters) – As China's blue chip index approaches an all-time high, growing fears that bubbles are developing in some parts of the country's stock market are causing some investors to look for bargains in Hong Kong.
Retail investors have poured money into stocks through mutual funds, pushing valuations to multi-year or even record levels in sectors such as consumer, healthcare and new energy.
For example, the CSI New Energy Index is up 15% so far this year after more than doubling in 2020, thanks in part to China's promise of carbon neutrality.
(Chart: China's New Energy, Healthcare, and Consumer Stocks Rise as the country's blue-chip index approaches a record high. Https://fingfx.thomsonreuters.com/gfx/buzz/qzjvqmyxkvx/China' s% 20new% 20energy% 20healthcare% 20and% 20consumer% 20stocks% 20lead% 20gains% 20as% 20the% 20country & # 39; s% 20blue – chip% 20index% 20nears% 20a% 20record% 20high.jpg) (Graphic: Reviews of China Stock market darlings rise, https: // fingfx. Thomsonreuters.com/gfx/buzz/yxmvjynzkpr/Valuations%20of%20China's%20stock%20market%20darlings%20surge.jpg)
"There are big bubbles in consumer, health and liquor stocks, with valuations of some of these stocks surpassing their previous record highs," said Dong Baozhen, chairman of Beijing-based private equity fund Lingtong Shengtai Investment Management.
"Your rally right now has nothing to do with fundamentals and carries enormous risk for investors," he added.
In the latest example of the retail hype, a Chinese mutual fund posted investor records worth $ 37 billion on its first day of sale.
(Graphic: China's mutual fund industry is growing fast, https://fingfx.thomsonreuters.com/gfx/buzz/nmopaowmqpa/China's%20mutual%20fund%20industry%20grows%20rapidly.jpg)
The rise in share prices was fueled by foreign and domestic funds as Chinese authorities unleashed massive stimulus to deal with the blow of the COVID-19 pandemic and the country's economy recovered faster than others.
As concerns about frothy valuations mount, some investors are turning to cheaper Chinese stocks that are listed in Hong Kong, especially as the US stock exchanges delist these companies and American investors are forced to outsource their stocks.
"The (US) bans actually tell people what good assets are in Hong Kong," said Xia Tian, general manager of Shanghai-based wealth management firm Minvest.
Investors buying from the mainland to Hong Kong through Stock Connect hit a record high of HKD 26.6 billion ($ 3.43 billion) on Tuesday, and total southbound New Year purchases came in at Thursday, according to stock market data HKD 221.8 billion.
The Stock Connect program gives investors access to both markets when they invest in A-Shares in mainland and H-Shares in Hong Kong.
Morgan Stanley (NYSE 🙂 believes the robust flows into Hong Kong were due to mainland policymakers encouraging outbound investment and an increased premium for domestic A-shares over Hong Kong-listed H-shares. China-listed A-shares of companies currently trade at a premium of more than 30% over their Hong Kong-listed stocks.
(Graphic: Mainland investors are looking for bargains in Hong Kong, https://fingfx.thomsonreuters.com/gfx/buzz/xlbvgylqevq/mainland%20investors%20hunt%20for%20bargains%20in%20Hong%20Kong.jpg)
The rally in China's A-share market was also driven by foreign investment. As of Thursday, foreign investors had bought A-shares through Stock Connect this year for a total of 48.7 billion yuan ($ 7.53 billion), one-fifth of what they bought in 2020.
UBS anticipates inflows of 200 billion yuan into the A-share market in 2021. This translates into improved Chinese legal protections for investors, better information disclosure by major shareholders, and more capable leaders in various industries.
(Graphic: Foreign investors continued to buy A shares in 2020, https://fingfx.thomsonreuters.com/gfx/buzz/oakveyodrvr/Foreign%20investors%20continued%20to%20buy%20A-shares%20in%202020.jpg)
Some investors believe the onshore exuberance is justified given China's solid economic recovery, continued political support, and further opening of capital markets.
"There's no foam in leading large-cap stocks seen as safer bets as China drives registration-based IPO reforms in the market," said Wang Mingli, executive director of Youpu Investment, a Shanghai-based private equity fund.
"Investors would come back later if they cut exposure for the time being as there are few options that reflect the country's future economic development," he added.
($ 1 = 6.4676)
($ 1 = 7.7517 Hong Kong dollars)