Under 'Connect' scheme, Chinese stock speculation spreads to Hong Kong

SHANGHAI, April 11 (Reuters) - Recent wild rides by China

companies listed in Hong Kong show that the "Connect" schemes

which move funds from mainland markets to Hong Kong's can also

carry in a different investor culture.

Last week, the staid Hong Kong exchange got a dose of the

kind of speculative "pump and dump" sometimes associated with

China's retail-driven markets.

Hong Kong-listed shares of BBMG, a Beijing-based

developer and cement maker, jumped as much as 63 percent after

China said it will build a major economic zone near the Chinese

capital.

Amid the surge, a Morgan Stanley downgrade knocked more

than 10 percent off the stock's price.

Mainland Chinese money was largely responsible for the

share's rocketing, exchange data showed, as investors took

advantage of the "Connect" schemes letting them buy Hong Kong

shares.

The BBMG case underscores mainland investors' growing

influence in the Hong Kong market - which could increase

pressure on regulators to protect small investors from getting

hurt by speculative inflows.

The Hong Kong Stock Exchange maintains it can deal

with any issues.

LOTS OF TOOLS

"The market has some new participants and market dynamics

may reflect that from time to time," a HKEx spokesman

said. "Hong Kong has a sound regulatory regime. Regulators of

the Hong Kong and Mainland markets have a lot of tools and will

take action if they suspect rule violations."

Ashley Alder, chief executive of the Securities and Futures

Commission – Hong Kong's markets regulator – said in November

it had stepped up coordination with the China Securities

Regulatory Commission.

"Cross-border supervision and investigation will become even

more essential to contain risks to our respective markets as

they experience even larger cross-border flows," Alder told a

Thomson Reuters conference.

The official Shanghai Securities News last month said

Shanghai, Shenzhen and Hong Kong exchanges are coordinating

supervision over illegal trading activities conducted via the

connect schemes.

Linus Yip, Hong Kong-based chief strategist at First

Shanghai Securities, said he is incorporating the growing

"southbound" flows from the mainland into his analysis.

"The market landscape is changing. Mainland investment

style and preference is being increasingly felt," Yip said.

Hong Hao, chief strategist at BOCOM International, said

there are concerns about market manipulation schemes. He

described BBMG's surge as speculative.

Hong Kong shares typically trade at discounts to their

mainland counterparts. Unlike Shanghai and Shenzhen-listed

stocks, they are not subject to daily limits and can be more

easily shorted.

FORGET FUNDAMENTALS

On April 5, when BBMG hit a two-year-high in Hong Kong, it

was the most actively-traded stock by Chinese investors under

the Connect launched in 2014. The next day, BBMG was the second

most actively traded stock, trailing only giant HSBC Holdings.

.

In 2015, mainland investors accounted for 22 percent of

stock trading among overseas investors in Hong Kong, compared

with 5 percent a decade ago.

Chinese investors have spent HK$104 billion ($13.4

billion)on Hong Kong stocks via the Connect this year, about 65

percent more than the 55.7 billion yuan ($8.07 billion) that

moved in the other direction, according to exchange data.

BBMG wasn't the first Connect-driven surge of Hong Kong

share. Chinese selfie app maker Meitu Inc and a maker

of Chinese spicy stewed duck neck, Zhou Hei Ya International

, saw dramatic swings last month.

Shanghai-based fund manager Shen Weizheng said he bought

into BBMG not based on fundamentals, but confidence he could

resell the shares at a higher price to other mainland investors.

(1 Chinese yuan = 1.1263 Hong Kong dollars)

($1 = 7.7698 Hong Kong dollars)

($1 = 6.9020 Chinese yuan)

(Reporting by Samuel Shen and John Ruwitch; Additional

reporting by Michelle Price in Hong Kong; Editing by Tony Munroe

and Richard Borsuk)