CHINESE mainland investors are so desperate to shift their money out of yuan-denominated assets that they are piling into some of the world’s worst-performing stocks.

    Mainland buyers purchased Hong Kong shares through the Shanghai stock link for a 10th week last week, even as the Hang Seng Index tumbled 6.7 percent. Mainland traders held 112.5 billion yuan (US$17.1 billion) of Hong Kong-listed equities by Monday, the most since the stock trading link program started in 2014, and up by 23.7 billion yuan since late October. With the yuan weakening, investors are looking for a way out, according to brokerage Reorient Group Ltd.

    “By buying Hong Kong stocks, it’s like buying the Hong Kong dollar,” said Uwe Parpart, chief strategist at Reorient. Mainland investors are expecting “further depreciation and when that’s the case it’s a good idea to get out. If you buy at a certain rate and then the yuan goes down, even when the stock market goes down, you may still be getting ahead in the game.”

    Hong Kong and mainland markets are at the epicenter of a global stock slump fueled by concern about China’s sliding currency and slowing economy. The Hang Seng Index was down 9.2 percent this year through Monday, while a rout in Shanghai and Shenzhen wiped out more than US$1.3 trillion in value.

    With forecasters expecting the yuan to weaken further against the U.S. dollar and restrictions on capital outflows whittling down investment options, the exchange link offers a government-sanctioned way for mainland investors to own assets in a strengthening currency.

    “Channels for outflows from the mainland are currently limited,” said Cindy Chen, Hong Kong-based country head of securities services at Citigroup Inc. “I expect the flow to continue.”

    After selling off Hong Kong stocks during a market rout last summer, mainland investors turned net buyers through the Shanghai link in the first week of November. Last month marked the biggest inflow since April, when the Hang Seng China Enterprises Index soared 17 percent. HSBC Holdings and Industrial & Commercial Bank of China were the most popular stocks for mainland traders in December, data compiled by the Hong Kong bourse show.

    While flows into the mainland from global investors have outstripped money moving into Hong Kong from the mainland since the exchange link started in November 2014, the trend is reversing. Foreigners owned about 7 billion yuan more of Shanghai equities than what mainland traders held in Hong Kong as of Monday, the narrowest gap on record.

    Mainland investors may be switching to stocks in Hong Kong, known as H shares, because their Shanghai counterparts trade at a significant premium and are performing badly, Citigroup’s Chen said. The Hang Seng China AH Premium Index, which measures the gap between prices of dual-listed companies, shows mainland shares are currently 40 percent more expensive.

    The yuan is down 1.2 percent against the U.S. dollar through Monday this year, and analysts expect a further 1.9 percent depreciation to 6.7 a dollar by the end of 2016. The Hong Kong dollar, the underlying currency for shares listed in the city, is pegged to the greenback. Mainland interest in Hong Kong stocks will probably continue as the yuan’s depreciation is likely to keep going for some time, said Reorient’s Parpart.

    Currency gains aren’t enough to offset the downside risk in the city’s shares, according to KGI Securities Co. analyst Ken Chen. H shares are more sensitive to fundamentals than mainland stocks, so will suffer more as China’s growth slows, he said. (SD-Agencies)