News Analysis: Mainland capital bolsters Hong Kong stock surge

Hong Kong shares powered ahead again on Thursday, extending the previous day's surge, as demand from the Chinese mainland buyers soared.

The Hang Seng Index jumped 2.7 percent to 26,944.39, its highest close since 2008. Turnover on the bourse rose to a record 291.53 billion Hong Kong dollars (37.62 billion U.S. dollars), as mainland investors capitalized on the Shanghai-Hong Kong Stock Connect scheme that allows them to trade here.

The stock connect scheme has met with scant interest since opening five months ago. The main catalyst for the renewed buying was a decision by mainland authorities last month to allow Chinese mutual fund managers to purchase directly through Stock Connect, rather than an existing quota system.

A buying spree by mainland investors saw the southbound 10.5 billion yuan (1.7 billion U.S. dollars) daily quota of the stocks through the scheme used up by 1:45 p.m., the second day in a row that their Hong Kong buying had to be suspended earlier than market close at 4 p.m. due to the quota being used up.

"Mainland capital flooded into Hong Kong's stock market, signaling that its good times come again," said Ronald Wan, a Hong Kong-based veteran investor.

Wan said the performance of the Hong Kong stock market will continue to be led by mainland capital over the next half year, and the index is expected to rise further.

Will Leung, Head of Investment Strategy of Standard Chartered Wealth Management, held similar views. "The bull market has returned as A shares and U.S. shares rebounded 20 percent from their lows and global merger activities increased," he said.

"The upward trend will likely to continue until the U.S. Federal Reserve announces interest rate rise," Leung said.

The expected Shenzhen-Hong Kong Stock Connect will attract more mainland's capital southward, further bolstering the Hong Kong stock market, he said, adding that it will hardly be a surprise if the Hang Seng Index touches 30,000.

However, Leung warned investors to be wary of greater stock market volatility and short-term downward pressures, but denied the possibility of dramatic decline of stock prices.

The Standard Chartered earlier forecast the Hang Seng Index to fluctuate between 27,922 and 23,312, and the Shanghai Composite Index between 4,016 and 3,049. Leung said both of the indices will exceed previous expectations.

Ding Chen, chairwoman of the Chinese Asset Management Association of Hong Kong, said the recent Hang Seng index rise was caused by the difference between prices of A/H shares.

"A company's A shares used to be cheaper than its H shares. But after this round of A share rally, many A shares are more expensive than its H counterparts. Before Hong Kong stocks rose radically Wednesday, a lot of blue-chip companies' H shares were already cheaper than A shares. So capital flows from the mainland into Hong Kong to hunt for profits. There will be more rises in future," she said.

Amid the bullish market sentiment, some white collars also tried to capitalize on the opportunity, but found it was not as easy as it seemed.

"I bought two shares immediately after opening an account this morning, but both of the shares ended lower," said Wang Ran with a mainland-invested company.

However, Wang said she believes her shares will rebound as the stock market is just beginning to flourish.

Huge rises in the Hang Seng Index over the past two days also stirred concerns over a bubble in the local stock market.

The Financial Secretary John Tsang said he couldn't see the risk of a bubble in the stock market, but warning that the market was volatile and urged small investors to be careful.

There were a number of reasons why the market surged on Wednesday, including pent-up demand for shares after several days of public holidays, he said, adding that the stock exchange is operating smoothly. Endi