Sept. 28 (Bloomberg) -- Hong Kong stocks are poised for their biggest quarterly gain since the SARS epidemic was contained in 2003, surging on speculation money from China's mainland will pour in as the government eases investment curbs.
China's government said Aug. 20 it will allow some individual investors to buy shares in Hong Kong, where valuations are less than half those on the mainland. The market got a boost when some Chinese mutual funds were also cleared to invest.
The Hang Seng Index, which yesterday closed above 27,000 for the first time, has gained 24 percent since the end of June. It hasn't done better since a 25 percent advance in the second quarter of 2003, when the World Health Organization declared the city free of the deadly severe acute respiratory syndrome virus.
``Given the prospect of Chinese liquidity moving into the market, there's no telling how quickly, or how high, the index would go,'' said Hugh Young, who oversees $50 billion at Aberdeen Asset Management Asia Ltd. in Singapore. ``Is it thinkable the Hang Seng could reach 30,000 very soon? Definitely.''
Chinese investors may funnel $100 billion into Hong Kong in the next 12 months, Adrian Mowat, JPMorgan Chase & Co.'s Hong Kong-based chief Asian strategist, wrote in a Sept. 18 report. William Liu, CLSA Ltd.'s head of China research, expects as much as $45 billion in the next six months. Daily turnover on the city's bourse has averaged $HK96 billion ($12.4 billion) this quarter and reached a record $HK147 billion yesterday.
Limit Growth
China's government is relaxing curbs on overseas investment to help prevent economic growth and domestic share prices from climbing too far, too fast. Growth reached a 12-year high of 11.9 percent in the second quarter, inflation is at a decade- high 6.5 percent and the CSI 300 Index has quadrupled in the past year, the best performance among 89 global benchmarks tracked by Bloomberg.
The Hang Seng Index had its biggest one-day gain in almost nine years on Aug. 20, when China's currency regulator said Chinese citizens with a Bank of China Ltd. account in Tianjin's Binhai economic zone will be allowed to invest in Hong Kong stocks. It's jumped another 25 percent since then on speculation China's households will pour some of their 17 trillion yuan ($2.3 trillion) of savings into the city's equities once restrictions are fully relaxed.
The market continued to rise this week even after the China Banking Regulatory Commission said on Sept. 21 that a quota on share purchases through the program will be imposed. Easing controls too rapidly may lead to an exodus of funds from the Shanghai and Shenzhen stock markets and increase financial risks, officials from the banking regulator said on Sept. 5.
Quotas Awarded
Signs that more Chinese mutual fund managers will be allowed to invest overseas has also helped boost Hong Kong equities. The government has so far granted $22 billion of quotas for investment abroad to select banks and fund managers under its qualified domestic institutional investor, or QDII, program.
Harvest Fund Management Co., Deutsche Bank AG's partner in China, today said it received regulatory approval to start investing overseas. It joins China Southern Fund Management Co., China Asset Management Co. and Hua An Fund Management Co in gaining official clearance.
The Hang Seng China Enterprises Index, which measures 43 so-called H shares of Chinese companies listed in Hong Kong, has climbed 26 percent in the past month, the best performance among 89 global benchmarks tracked by Bloomberg. The Hang Seng is in second place, with an 18 percent increase.
Too Costly?
``Hong Kong is the sort of market that can attract money quickly,'' said Shun Tak Pang, a Hong Kong-based investor at JPMorgan Chase & Co.'s private banking unit, which looks after more than $400 billion of global assets. ``We have all this news about China money flowing in. It's a very unique story.''
Some analysts caution that the city's stocks have become too expensive given the outlook for profits. The Hang Seng is valued at 19.5 times estimated earnings, the highest since March 2004. That compares with 44 times for China's CSI 300 Index.
The Hang Seng's 14-day relative strength index ended yesterday at 80, 10 points above the threshold some investors view as a trigger to sell.
``The market will face a correction at 28,000,'' said Francis Lun, general manager at Fulbright Securities Ltd. in Hong Kong. ``Whatever goes up, must come down sometime. I have mountain sickness right now. I need to move down to a lower level to breathe.''
Aberdeen's Hugh Young isn't convinced. About a fifth of his company's investments are in Hong Kong stocks.
``We thought the mainland Chinese stock market was expensive at the start of the year, and look what it's done,'' he said.
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