CICHY China Construction Bank Corp (PK)

By Anjie Zheng 

HONG KONG -- Chinese investors are plowing money into well-known Hong Kong-listed stocks as they join the global hunt for yield and safe assets, a trend that points to a change in investing tastes on the mainland.

The surge of mainland money has helped boost the share prices of the major Chinese banks listed in Hong Kong, such as Industrial & Commercial Bank of China Ltd., the world's biggest bank by assets, and China Construction Bank Corp.

Chinese investors have also piled into blue-chip companies such as global bank HSBC Holdings PLC and tech giant Tencent Holdings Ltd. this year, the two biggest components of the index.

Mainland Chinese investors, who can access the Hong Kong market via a trading link with the Shanghai exchange, have in the past preferred investing in smaller companies that had high growth potential but carried plenty of risk.

This year, amid relatively subdued markets -- the Hang Seng is up 4.85% in 2016 -- Chinese investors have swung toward companies that may have less exciting prospects but at least pay a decent dividend. ICBC, for example, yields around 5.6%, while HSBC yields 7.7%. That compares with an average dividend yield of 3.5% for Hang Seng Index stocks and 2.1% for Shanghai Composite shares.

"Chinese investors last year bought small-caps because they were chasing capital gains since the market was rallying strongly," said Edmond Law, an analyst at UOB Kay Hian Research. "This year, because the market isn't performing as strongly, they are chasing yield."

Bi-weekly data on the most popular stocks for Chinese funds buying Hong Kong shares via Shanghai bear out the trend. ICBC's Hong Kong shares, for example, have been among the 10 most-traded stocks during 12 two-week periods out of 15 this year, helping push its share price up 5.3% this year. Over the same period last year, it was a top-traded stock just once.

One attraction for mainland investors is that shares of dual-listed Chinese companies, particularly banks, are often cheaper in Hong Kong, where they are known as H-shares, than in Shanghai, where they are called A-shares. ICBC trades at a 5.1% discount in Hong Kong, for example, while China Construction Bank Corp. and Agricultural Bank of China Ltd. trade at 4.9% and 16.8% discounts, respectively. Hong Kong-listed shares of China Construction Bank are up 9.2% this year, while Agricultural Bank is up 0.6%.

The difference means the yield is higher in Hong Kong -- an increasingly important consideration for mainland investors, according to Qi Wang, chief executive at MegaTrust Investments, a mainland-based fund manager.

The shift into high-dividend stocks is "not a temporary market change like picking different sectors every month," Mr. Wang said. "It's a long-term secular change. Very few A-shares pay dividends. So investors are desperately seeking higher yield. This is something we're seeing in both A- and H-share markets."

There is little clear data on what type of mainland investors are leading the charge into major Hong Kong-listed stocks. However, the trend appears to be driven in part by large institutional investors such as insurance and pension funds, because Chinese retail investors are still less focused on high-yield stocks, according to Jian Shi Cortesi, China fund manager at GAM Holding AG, which manages $115.49 billion globally.

Chinese investors' hunt for yield has helped so-called southbound investment flows from Shanghai to Hong Kong via the Stock Connect system to outweigh those going in the other direction this year. And analysts expect that more money could start to flow from the mainland into Hong Kong later this year, when a new trading link between Hong Kong and the Shenzhen Stock Exchange is opened.

For sure, Chinese investors have other reasons to invest in Hong Kong. Often it is the only place they can buy shares in major Chinese brands that don't have a listing at home, such as Tencent, electric-vehicle maker Geely Automobile Holdings Ltd., telecom giant China Mobile Ltd. and casino operator Sands China Ltd.

Some Chinese investors have also looked to invest in Hong Kong to act as a defense against currency depreciation. The yuan has dropped 7% in the past year against the U.S. dollar. The Hong Kong dollar is pegged to the greenback.

"High-yielding bank stocks are being used as a proxy against the weakening yuan," said Wendy Liu, equity strategist at Nomura Holdings Inc.

Write to Anjie Zheng at Anjie.Zheng@wsj.com

(END) Dow Jones Newswires

September 01, 2016 02:48 ET (06:48 GMT)

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