Hong Kong breaks volume record as rally continues

Hong Kong shares rallied for a second day running on Thursday, amid another flurry of buying from mainland China and record trading volumes.

The Hang Seng index rose as much as 6.4 per cent in the opening minutes of the session, but ended the day up 2.7 per cent for its highest close since January 2008. The Hang Seng China Enterprises index - mainland companies listed in Hong Kong - finished with a 2.6 per cent gain.

Turnover on the Hong Kong market rose above $37bn, breaking the record set just one day earlier. The London stock exchange had an average daily turnover of around $9bn last month.

Hong Kong Exchanges & Clearing, the bourse operator, rose 8.9 per cent. It has now risen by more than a third in the past five trading days.

Strong Chinese demand for Hong Kong stocks exhausted the Rmb10.5bn ($1.7bn) daily quota for net buying through the Stock Connect just before 2pm. Total turnover through the cross-border trading scheme hit a new record, in part due to heavy selling of Shanghai-listed shares by international investors.

The recent shift in focus to offshore Chinese shares has dented the rally on the mainland. The Shanghai Composite slipped 0.9 per cent, while the Shenzhen market fell 0.6 per cent.

Francis Cheung, China equity strategist at CLSA, said the Hong Kong market is being used as an outlet to release pressure from the mainland Chinese market, which has risen sharply this year.

Exchange traded funds listed in China but tracking Hong Kong stocks saw a dramatic surge in activity. Turnover for the AMC China Hang Seng ETF topped Rmb1.8bn, compared to a daily average in March of just Rmb14m.

Grace Tam, global strategist at JPMorgan Asset Management, said that mainland retail investors have turned their attentions to Hong Kong because shares there are trading at a large discount to those in Shanghai.

"Given the very strong rally in China, valuations are no longer cheap. In fact, they are quite expensive", she said. "I would expect the we will see the [price] gaps close over the next few weeks."

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