Chinese Retail Investors Move Stock Bubble to Hong Kong

April 9, 2015 Updated: April 24, 2016

If you think you have been blessed with the returns of the U.S. stock market, you should look at the Chinese market.

Domestic Chinese stocks trading in Shanghai have roughly doubled in nine months, compared to a return of just more than 10 percent in the S&P 500. Now the bubble is moving to Hong Kong.

The average Chinese retail investor is not very educated.

Chinese retail investors, borrowing money to buy stocks have recently found out that the same stocks they are buying in Shanghai are much cheaper in Hong Kong. And now mutual funds are allowed to buy them as well.  

One year performance of the Shanghai Composite Index (Google Finance)
One-year performance of the Shanghai Composite Index. (Google Finance)

The recent relaxation of trading rules between Shanghai and Hong Kong have boosted mainlander’s appetite to directly invest in Hong Kong stocks.

For good measure, the China Securities Journal on Thursday told people to “Go! Buy Hong Kong Stocks!,” moving the Hong Kong Hang Seng index up 10 percent in five days on record volumes.

Five day performance of the Hong Kong Hang Seng index (Google Finance)
Five-day performance of the Hong Kong Hang Seng index. (Google Finance)

So why are Chinese going crazy about stocks again and why are they suddenly so keen on buying Hong Kong shares?

A Chinese savings account yields little so previously Chinese bought real estate hand over fist to stash their hard-earned money. Then the housing market rolled over in the summer of 2014, prompting some stimulus from the Chinese central bank.

However, the stimulus did not move to real estate and instead went into stocks, which started rising exponentially in the fall of 2014.

The Move to Hong Kong

The average Chinese retail investor is not very educated, so they won’t understand about valuations, but savvy mainland mutual funds must have noticed that mainland valuations are at nosebleed levels.

The average stock in the leading Chinese technology sector now has an average price to earnings ratio of 220 times reported profits—much higher than that of the average Nasdaq stock (156) before the famous crash in 2000.

Only two weeks ago, the Chinese regulator allowed mutual funds to use the Hong Kong Shanghai Stock Connect trading link and they are taking advantage of the 30 percent discount Hong Kong stocks are trading compared to mainland shares of the very same company.

Thanks to the call in the China Securities Journal, retail investors are also on board and the full quota of 10.5 billion yuan ($1.7 billion) allotted to mainland investors per day has been used up for two days in a row.