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Hong Kong Stocks Surge on China's Cash

Julian Luk

Market players are keeping a close eye on Hong Kong's soaring stock prices. Shares in Asia's financial center have reached their highest level in recent weeks. And experts say a flood of investor money from Mainland China is behind the strong rally.

Since the beginning of this month, telephones at this Hong Kong brokerage have been ringing off the hook. Mainland investors have been calling to buy local shares. Hong Kong-listed Chinese businesses are in red-hot demand. The companies may not be known internationally, but their stock prices have been posting jaw-dropping gains. One of the reasons for the surge is price differences between the Hong Kong and Shanghai markets. Many Chinese companies listed in Hong Kong are also trading in Shanghai.

But Shanghai has been overheating in recent months. Stocks of the same firms in Hong Kong are about 20% cheaper. Buyers have been hunting these shares.

Easing financial regulations in China have also helped ignite trading in Hong Kong. Last November, a new trading system started in Hong Kong and Shanghai. Up until then, only institutional investors authorized by the Chinese government had been able to buy Hong Kong-listed stocks. Individual investors couldn't. Now, however, they can also tap the same market through the Shanghai bourse.

That's not all. At the end of last month, Chinese authorities announced plans to also allow mutual funds to participate in trading in both cities. This has sent mainland investor money pouring into Hong Kong.

Shenzhen is a booming southern Chinese city located next to Hong Kong. A series of recent investor seminars have catered to individual investors who are hungry for Hong Kong stocks.

The Hong Kong and Shenzhen bourses are also expected to be linked this year. Securities houses are now trying to grab new mainland clients before the plan goes into effect. "Under the new system with Shanghai, the number of mainland Chinese customers has increased tenfold," says Nelson Chan, CEO of Bright Smart Securities. "Mainland capital will completely change the Hong Kong financial industry."

As China pushes market deregulation, the rising tide of investor money from mainland China is changing the financial landscape in Hong Kong.

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