SHANGHAI Recent wild rides by China companies listed in Hong Kong show that the "Connect" schemes which move funds from mainland markets to Hong Kong's can also carry in a different investor culture.
Last week, the staid Hong Kong exchange got a dose of the kind of speculative "pump and dump" sometimes associated with China's retail-driven markets.
Hong Kong-listed shares of BBMG (2009.HK), a Beijing-based developer and cement maker, jumped as much as 63 percent after China said it will build a major economic zone near the Chinese capital.
Amid the surge, a Morgan Stanley downgrade knocked more than 10 percent off the stock's price.
Mainland Chinese money was largely responsible for the share's rocketing, exchange data showed, as investors took advantage of the "Connect" schemes letting them buy Hong Kong shares.
The BBMG case underscores mainland investors' growing influence in the Hong Kong market - which could increase pressure on regulators to protect small investors from getting hurt by speculative inflows.
The Hong Kong Stock Exchange (0388.HK) maintains it can deal with any issues.
LOTS OF TOOLS
"The market has some new participants and market dynamics may reflect that from time to time," a HKEx spokesman said. "Hong Kong has a sound regulatory regime. Regulators of the Hong Kong and Mainland markets have a lot of tools and will take action if they suspect rule violations."
Ashley Alder, chief executive of the Securities and Futures Commission – Hong Kong's markets regulator – said in November it had stepped up coordination with the China Securities Regulatory Commission.
"Cross-border supervision and investigation will become even more essential to contain risks to our respective markets as they experience even larger cross-border flows," Alder told a Thomson Reuters conference.
The official Shanghai Securities News last month said Shanghai, Shenzhen and Hong Kong exchanges are coordinating supervision over illegal trading activities conducted via the connect schemes.
Linus Yip, Hong Kong-based chief strategist at First Shanghai Securities, said he is incorporating the growing "southbound" flows from the mainland into his analysis.
"The market landscape is changing. Mainland investment style and preference is being increasingly felt," Yip said.
Hong Hao, chief strategist at BOCOM International, said there are concerns about market manipulation schemes. He described BBMG's surge as speculative.
Hong Kong shares typically trade at discounts to their mainland counterparts. Unlike Shanghai and Shenzhen-listed stocks, they are not subject to daily limits and can be more easily shorted.
On April 5, when BBMG hit a two-year-high in Hong Kong, it was the most actively-traded stock by Chinese investors under the Connect launched in 2014. The next day, BBMG was the second most actively traded stock, trailing only giant HSBC Holdings. (0005.HK).
In 2015, mainland investors accounted for 22 percent of stock trading among overseas investors in Hong Kong, compared with 5 percent a decade ago.
Chinese investors have spent HK$104 billion ($13.4 billion)on Hong Kong stocks via the Connect this year, about 65 percent more than the 55.7 billion yuan ($8.07 billion) that moved in the other direction, according to exchange data.
BBMG wasn't the first Connect-driven surge of Hong Kong share. Chinese selfie app maker Meitu Inc (1357.HK) and a maker of Chinese spicy stewed duck neck, Zhou Hei Ya International (1458.HK), saw dramatic swings last month. Shanghai-based fund manager Shen Weizheng said he bought into BBMG not based on fundamentals, but confidence he could resell the shares at a higher price to other mainland investors.
(1 Chinese yuan = 1.1263 Hong Kong dollars)
($1 = 7.7698 Hong Kong dollars)
($1 = 6.9020 Chinese yuan)
(Reporting by Samuel Shen and John Ruwitch; Additional reporting by Michelle Price in Hong Kong; Editing by Tony Munroe and Richard Borsuk)