MAINLAND investors are placing increasing bets on Hong Kong stocks, partly in search of a safe haven from the decline in the yuan, which last week ago fell to its lowest levels against the dollar since 2010.

    The investment flows underline concerns that the slide in the yuan could increasingly fuel capital outflows from the mainland, although official data suggest speculative capital flight is under control for now.

    “You buy Hong Kong shares for two reasons: they’re cheap and you can dodge yuan depreciation,” said Liu Haiying, chairman of Haiying (Shanghai) Investment Consulting Co.

    Shares priced in Hong Kong dollars provide a hedge against a falling yuan — so long as the shares at least hold their value — because the Hong Kong currency is pegged to the U.S. dollar.

    The investment flows into Hong Kong resulted in record increases in assets under management in June for some mainland funds that are permitted to manage outbound investment.

    Money has also flowed into the territory via the Shanghai-Hong Kong stock connect scheme at the fastest rate since early last year when investors bet a rally in mainland shares would spill over to Hong Kong.

    The flows picked up sharply from May as a rising trend in the yuan against the dollar turned into a decline. By Wednesday last week, the yuan had fallen to 6.6980 per dollar, its lowest level against the dollar since 2010.

    Any significant yuan decline puts investors on edge after the central bank sent shock waves through global markets last year by devaluing the currency and sparking a rush of capital flight by mainland Chinese.

    “Capital outflows have been continuing at pace and they are a lot larger than what the authorities would have us believe through the official data,” said Sue Trinh, Hong Kong-based Asia currency strategist at Royal Bank of Canada.

    She expects the yuan to slide to 6.95 per dollar by the end of 2015 for a record full-year decline of 6.6 percent.

    While other emerging market currencies are sliding as well in the wake of the Brexit vote, the yuan is the worst performer in Asia against the dollar this year. Officials have repeatedly said China has no intention of stimulating trade via a depreciation of the yuan.

    Some of the lowest valuations for Hong Kong stocks since the global financial crisis added to the appeal of shifting money into the territory, traders said.

    Calculations show mainland investors poured more than US$10 billion into Hong Kong shares in the 46 days to July 4 using the Shanghai-Hong Kong stock connect scheme, one of the two main channels available for mainlanders to invest in offshore stocks and bonds. The flows in May were the biggest since April 2015.

    Top stock picks using the connect scheme including China Construction Bank, ICBC and Agricultural Bank of China and Tencent.

    Money also flowed into Hong Kong via mutual funds under the Qualified Domestic Institutional Investor (QDII) scheme, another of the main channels for outbound investment.

    Assets under management at the E Fund Hang Seng China Enterprises Index ETF, the mainland’s biggest exchange-traded fund investing in Hong Kong shares, jumped 44 percent to more than 10 billion yuan (US$1.50 billion) over the past two months, stock exchange data show.

    In June alone, its assets under management jumped a record 24 percent to 1.7 billion yuan.

    Assets under management at another outbound fund, the China AMC Shanghai Hong Kong Hang Seng ETF, surged 500 percent to 1.65 billion yuan during the period. They jumped 162 percent in June alone, its biggest monthly increase.

    (SD-Agencies)