China Stocks Are Better Shelter Than Hong Kong in Xi’s Clampdown

(Bloomberg) -- Owning shares in China is proving a better proposition than Hong Kong for investors seeking shelter from a rout driven by Beijing’s policy pivots.

The CSI 300 Index, which tracks the largest companies in Shanghai and Shenzhen, outperformed the Hang Seng China Enterprises Index by nearly two percentage points over the last two days amid worries over new regulatory crackdowns in the tech sector.

That performance gap - which was at the most in a year in July - could potentially widen. Foreign investors poured money into China through trading links for the last five days, while net selling equities in Hong Kong. The divergence shows how funds are already seeking winners and losers in the recent rout as President Xi Jinping drives policies seeking to curb monopolistic practices.

With many index-dominating Chinese internet, app and gaming leaders listed in Hong Kong rather than onshore, H shares plunged into bear-market territory last month, a fate avoided by mainland stocks.

“CSI 300 gauge will likely outperform China H-share indices in the near-term -- as the former has much lower exposure to foreign capital, foreign growth and to sectors that are coming under regulatory scrutiny,” Nomura Holdings Inc. strategists led by Chetan Seth wrote in a note on Sunday.

Overseas investors exacerbated a $1 trillion global selloff last week in Chinese shares after the government’s ban on profits at tutoring companies sparked worries about what other industries could be targeted.

One victim of the tech selloff that began in earnest in February is the HSCEI, which has tumbled 13% year-to-date versus a 5% decline in the CSI 300, where financials command the most weight.

The mainland gauge has also been buoyed by its exposure to semiconductor and so-called green stocks, which have emerged as investor favorites due to supportive government policies. Shares of Advanced Micro-Fabrication Equipment Inc. China and Sungrow Power Supply Co. rose 39% and 46%, respectively, last month.

Although they have limited access, international investors are already showing a new preference for onshore equities. Foreigners snapped up a net 21.5 billion yuan ($3.3 billion) over the past five trading sessions, but have been net sellers of Hong Kong stocks on the same platforms for a record 12 days, data compiled by Bloomberg show.

“The A-share market should resume an upward trajectory after domestic credit growth bottoms -- possibly in October 2021 in our view -- and continue to outperform MSCI China,” UBS Group AG analyst Meng Lei wrote in a note on Monday.

©2021 Bloomberg L.P.

With assistance from Bloomberg