The Chinese authorities’ efforts to contain leverage and reduce risk across the nation’s financial system took another step forward overnight with the ban on approvals for mutual funds that plan to allocate more than 80% of their portfolios to Hong Kong stocks. This looks like a response to surging capital flows into the territory from the mainland and the equity market euphoria in Asia, which saw the Hang Seng index cross the 30,000 mark last Wednesday for the first time in 10 years. As we noted in “Very Close To Irrational Exuberance: Asian Equities Break Above All-Time High As Hang Seng Clears 30,000”.

Ongoing southbound flows from the mainland exchanges in Shanghai and Shenzhen – via the connect trading scheme – helped to propel the rally.

The South China Morning Post has more:

China’s securities regulator will suspend the approval of new mutual funds that are meant for investing in Hong Kong’s equity market, putting a temporary cap on southbound capital that has boosted the city’s benchmark stock index to a decade high.

Chinese mutual funds which plan to allocate more than 80 per cent of their portfolio to Hong Kong-listed equities will no longer be approved for sale on the mainland, according to two state-owned funds familiar with the matter, citing an order by the China Securities Regulatory Commission. Only funds that allocate less than half of their portfolio to Hong Kong will be approved, the funds said, echoing a Monday report on the China Fund website, an industry news site.

The Chinese regulator ‘s latest instruction reflects the concern that Hong Kong’s key stock benchmark has risen too much too quickly to a level that was last attained in 2007, before the global financial crisis a year later caused the Hang Seng Index to plunge 33 per cent, and wiped out billions of dollars of value.

As the SCMP notes, the “Connect schemes” linking mainland stock exchanges to Hong Kong have led to a $100 billion inflow into Hong Kong equities so far in 2017.