Chinese Investors Yank Record Funds From Hong Kong Stocks

• Net selling of Hong Kong equities swells to $490 million
• Investors cautious before Powell testimony, China meetings

During good times and bad, Hong Kong stock investors have been able to rely on the support of mainland Chinese buyers -- until today.

Net selling of Hong Kong shares via Chinese exchange links swelled to 3.1 billion yuan ($490 million), Bloomberg calculations based on daily quota usage showed. That’s the biggest outflow since a second investment channel with the mainland was set up in December 2016. The benchmark Hang Seng Index slid 0.8 percent, reversing an earlier gain of 1 percent.

Analysts pointed to concern about Jerome Powell’s first congressional testimony as Federal Reserve chairman later today, as well as caution ahead of annual legislative meetings in China, to explain the shift in sentiment.

The losses come after China’s financial markets reacted positively on Monday to news that presidential term limits in the country are set to be removed, allowing Xi Jinping to extend his rule indefinitely. The Communist Party’s third plenary session and the National People’s Congress will take place over the next couple of weeks, with deleveraging being a focus.

"The regulator meetings are about to start in China, which has made mainland investors more cautious," said Linus Yip, Hong Kong-based strategist with First Shanghai Securities Ltd. "The market is worried that China will step up monetary tightening and announce more curbs on financial markets during the meetings."

Mainland investors had been obdurately bullish toward Hong Kong equities in the past year or so, selling on only a handful of days and stepping up purchases when the Hang Seng Index plunged 9.5 percent in the week through Feb. 9.

A measure of Chinese stocks traded in Hong Kong tumbled 2 percent on Tuesday. Price swings in the Hang Seng China Enterprises Index in the past month are the biggest among global benchmarks after a 16 percent surge in January turned to losses in February. Investors were equally bearish toward domestic equities, with the Shanghai Composite Index sliding 1.1 percent.

"Investors might want to lock in some profits in Hong Kong" before the key meetings in China, said Banny Lam, head of research at CEB International Investment Corp. in Hong Kong. "They’ll likely await comments from the U.S. to gauge the pace of rate increases, and it’s better to stay away before that uncertainty is removed."

The Hang Seng China gauge is the world’s worst performing global benchmark this month with a 6.8 percent loss, though it’s still up 8 percent for the year. Hong Kong is vulnerable to the pace of U.S. monetary tightening due to a currency peg to the greenback.

Bloomberg.com