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[TOKYO] Hong Kong is set to overtake Japan as the world's third-largest stock market, spurred on by surging Chinese demand for shares in the former British colony.
The value of equities listed in Hong Kong rose to US$4.9 trillion on Thursday, catching up to the US$5 trillion total for Japanese stocks. Mainland shares in Hong Kong jumped 8.9 per cent this week, the best performance of 93 equity gauges tracked by Bloomberg, helping put Hong Kong on course to take third spot behind the US's US$24.7 trillion and mainland China's US$6.9 trillion. Turnover in Hong Kong surpassed Japan on both Wednesday and Thursday.
The stock mania that pushed the Shanghai Composite Index up 87 per cent in the past 12 months spread to Hong Kong this week, after valuation discounts in the city reached the most extreme levels since 2011 and mainland authorities made it easier for domestic funds to use a cross-border bourse link. Baring Asset Management Ltd. says the rally in Hong Kong has room to run.
"There will be more convergence between the mainland Chinese market and Hong Kong," said Khiem Do, who helps oversee about US$60 billion at Baring Asset in Hong Kong. "The trend will be positive for Hong Kong."
Flows from across the border started to accelerate after the securities regulator increased access to the bourse link for mainland fund managers on March 27. Chinese investors bought the maximum daily allowance of 10.5 billion yuan on Wednesday and Thursday for the first time since the program started in November.
Japan is poised to drop to No. 4 even as the nation's shares almost double under Prime Minister Shinzo Abe. The Nikkei 225 Stock Average briefly traded above 20,000 Friday for the first time in 15 years. Stocks are climbing as the Bank of Japan pumps record amounts of money into exchange-traded funds and nation's public pensions shift from bonds to equities.
"If Japan was overtaken while Japanese shares were declining, that would signal we're in a downfall," said Koji Toda, chief fund manager at Resona Bank Ltd in Tokyo."
But the Japanese market is actually rising on hopes that monetary easing will help us escape deflation. And if Chinese stocks are rallying on expectations the government will prop up the economy, that's great news for all economies."
Hong Kong's value relative to Japan is helped by the city's currency peg to the US dollar. The yen has weakened 17 per cent against the greenback over the past two years, reducing the value of Japanese shares in US dollar terms.
A similar story is playing out at the nations' bourses. Hong Kong Exchanges & Clearing overtook CME Group as the world's largest exchange by market value on Wednesday. Japan Exchange Group Inc, which operates the Tokyo Stock Exchange, stands at No 7, even as shares soared since listing at the start of 2013.
Valuations favor Hong Kong. The Hang Seng Index traded at 12.9 times estimated earnings at Thursday's close, with the Hang Seng China Enterprise Index of mainland companies valued at 9.6 times expected profit. That compares with 15.5 for Japan's Topix index, and 17.7 for the Standard & Poor's 500 index.
The Shenzhen Stock Exchange, China's other main stock- trading venue, is planning to link with Hong Kong later this year. Baring Asset's Mr Do says that will send more mainland money into Hong Kong.
"In China, the authorities have indirectly discouraged investors from punting the property market and the high-yield market," said Mr Do. "So where do they go? There's only one other avenue: Hong Kong stocks."