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[HONG KONG] Hong Kong's stock market is suffering from a post-holiday hangover.
The flood of Chinese money into the city before the mainland's National Day celebrations in early October has slowed to a trickle since traders returned from the week-long break.
Investors in Shanghai spent more than US$8 billion on Hong Kong shares in September, the biggest monthly inflow through the exchange link since it began in 2014.
Net buying this month has been just seven per cent of that amount, data compiled by Bloomberg show.
The narrowing valuation discount on the city's dual-listed shares and concern about the Federal Reserve's impending rate increase may have spurred mainland investors to turn off the taps, according to Hong Kong analysts, who also say they're perplexed at the speed of the shift.
The change is a headwind for equities after the influx of Chinese money helped drive the Hang Seng Index up 12 per cent last quarter for its best such gain in seven years.
"It's a bit of a mystery as to why this is happening," said Mohammed Apabhai, head of Asia trading strategy at Citigroup Inc.
"Nobody has put forward a convincing explanation about exactly why the southbound flow has dried up and whether it's a temporary phenomenon. That has removed one of the supports from the Hong Kong equity market."
China International Capital Corp Ltd cut its rating on Hong Kong-listed mainland banks last week, citing the dwindling inflows.
Trades from Shanghai made up as much as 17 per cent of the total turnover in Hong Kong at one point last month, the highest on record, data compiled by Bloomberg show.
That ratio had dropped to less than seven per cent on Oct 20. The exchange link, started about two years ago, opened up a channel for Chinese individual investors to buy Hong Kong stocks, while giving foreign investors more access to mainland shares.
"This surprised a lot of people," said Ronald Wan, chief executive of Partners Capital International Ltd in Hong Kong.
"People thought a lot of funds will be channeled from the north. The flow will come back eventually if third quarter figures demonstrates genuine improvement in the Chinese economy and whether that converts to earnings as well."
The slowdown in southbound flow just a temporary phenomenon, according to Cheuk Wan, Hong Kong-based head of Asia investment strategy at HSBC Private Bank.
Interest will pick up again and lend support to the Hong Kong market as mainland investors continue to look for ways to diversify their assets amid a weakening yuan, she said.
So far, the flow hasn't picked up, even as China's currency trades at a six-year low against the dollar. Net buying totaled 275 million yuan (S$57.187 million) on Oct 20, according to exchange data compiled by Bloomberg. Hong Kong's market was shut Friday because of a typhoon.
For Uwe Parpart, Hong Kong-based chief strategist at investment bank Capital Link, the outlook isn't bright for the city's equities. Mainland A shares offer better opportunities than stocks in Hong Kong, which is facing headwinds from a possible December interest-rate hike by the Federal Reserve, he said. With Hong Kong's currency pegged to the dollar, its borrowing costs track US rates.
"I'm sure that people are seeing that, and realising that right now it's probably better to keep their money at home than sending it abroad," Mr Parpart said.
It's not only volumes that have changed, with mainland investors shifting their attention to a different group of Hong Kong stocks as well.
Some of the names that saw the biggest inflows in September, mostly financials such as HSBC Holdings Plc, Industrial & Commercial Bank of China Ltd and China Construction Bank Corp, have been sold heavily or have disappeared from the top-traded stocks this month.
The change may be due to concern that the lenders are being swept up in China's property boom, raising the likelihood of mounting bad debts, according to Castor Pang, head of research at Core-Pacific Yamaichi Hong Kong.
Uncertainties in the sustainability of southbound inflow will remain in the short term, CICC analyst Jie Huang wrote in a note last week, turning more cautious on Chinese financial stocks.
In the long run, the discount on Hong Kong-traded H shares compared with mainland A shares is expected to disappear and flows are likely to come back, according to Sean Darby, Hong-Kong based chief equity strategist at Jefferies Group LLC. For now, investors are keeping a close eye on the daily buying activity.
"The market was surprised," said Raymond Chan, chief investment officer for Asia Pacific at Allianz Global Investors.
"If this flow doesn't come back, it could certainly have negative implication on the market because you don't have this source of buying from the mainland. I don't have conviction to say which way it will go."