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Hong Kong's Stock Mark Soars in Expectation of Investor Flood From China


Hong Kong's stock market has been soaring since Beijing announced two weeks ago that mainland Chinese retail investors will be able to buy shares in the territory. But not everyone thinks the euphoria is justified, as Claudia Blume reports from Hong Kong.

Almost unfazed by the U.S. mortgage finance crisis that has rattled markets around the world, Hong Kong's Hang Seng Index reached record heights in recent weeks.

The main reason for the euphoria: An announcement by Beijing two weeks ago that Chinese retail investors will soon be allowed to invest in the Hong Kong market. David Webb is a Hong Kong stock analyst.

"It has caused the market to soar even though the scheme has not yet started," he said. "The shares of particularly mainland companies listed in Hong Kong have gone up over 28 percent already."

Beijing's move is part of a push to expand investment opportunities for its citizens. China's households have almost four trillion dollars in savings but few places to invest it. Apart from buying property and leaving their money in the bank, earning very low interest, retail investors until now could only buy shares on the volatile stock markets of Shanghai and Shenzhen.

There is so much cash flowing into China's stock markets, that the main Shanghai stock price index has tripled in value in the past year, despite government efforts to slow its rise. Many investment experts in Hong Kong and the mainland are concerned that shares have risen so fast that prices could deflate very quickly if there is market reversal, costing millions of investors their savings.

Under the new trial program, Chinese investors will be able to invest in the Hong Kong stock market, but only after opening an account at the Bank of China branch in the northern city of Tianjin.

Stephen Green - senior economist at Standard Chartered Bank in Shanghai - says the trial program is a historic step.

"It's the first time Chinese investors have been allowed to directly invest in offshore shares," he said. "Now obviously we have to wait for a couple of months for it to actually happen in practice but it is a really significant step forward."

Many in Hong Kong's financial industry expect to see a flood of eager mainland Chinese buyers once the program starts. The operators of the Hong Kong stock market said they will invest more than $10 million to be able to handle four million trades a day - more than double what it processes now.

But some observers remain skeptical. David Webb thinks the recent euphoria on the Hong Kong stock market was an over-reaction. The Hang Seng Index has jumped 15 percent in three weeks.

"There are two scenarios in my view," said Webb. "The first scenario is that this is only a very limited trial scheme and that there will be various disincentives or barriers that keep the actual size of the outflow from the mainland fairly small."

In that case, he says, the demand for shares would be limited. But Webb says even if mainland investors can invest as much as they like in offshore markets, it would not necessarily be beneficial for Hong Kong. He says the mainland stock market bubble could then probably burst and bring Hong Kong down with it.