Investors Could Short Hong Kong to Hedge Long Shanghai Positions (BOCOM International)

Besides the Occupy Central protests, Hong Kong and China investors are focused on the coming Shanghai-Hong Kong Stock Connect which will give foreign investors unprecedented access to mainland shares by allowing 13 billion yuan ($2.1 billion) of net buying per day.

Under the Shanghai-Hong Kong Stock Connect, the Stock Exchange of Hong Kong Limited (SEHK), a wholly-owned subsidiary of HKEx, and the Shanghai Stock Exchange (SSE) will establish mutual order-routing connectivity and related technical infrastructure (Trading Links) to enable investors of their respective markets to trade shares listed on the other’s market. This will have important ramifications for all investors as China is counting on a successful Connect program to help liberalize its financial system and increase use of the yuan.

With that in mind, its worth noting what Hao Hong, a Hong Kong-based strategist at Bocom International Holdings Co, had to say in his firm’s Market Commentary on Monday:

Shanghai outperforming Hong Kong: Traders must also recognize that the mainland’s market structure may have changed by how margin financing is encouraged and deployed by risk-seeking traders. Previously, the margin requirement in stock index futures trades has been reduced. Further, the account requirements for margin lending have been lessened by some brokers.The balance of margin buying was around 600 billion yuan last week at its all time high, and has become one of the more important income sources for mainland brokers. Over the weekend, the detailed rules of the Connect program, which have come earlier than expected, have been amended to let HK investors use margins easier when trading mainland shares. With the situation unfolding in HK, it is conceivable that overseas investors could short Hong Kong as a hedge for their long Shanghai positions after the Connect program commences. Such a move will further boost the liquidity available to the mainland shares, but will also accelerate the exhaustion of the program’s trading quota.

To read the whole Market Commentary for September 29th, go to the website of BOCOM International. In addition, check out the following articles: Occupy Central Protests Will Hurt These Hong Kong Stocks (SCMP) and Fund Manager Consensus: Hong Kong Needs China More Than Vice Versa (AsianInvestor).

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