Don’t Blindly Worship Northbound Capital

For a time, northbound capital was hailed as “smart money.” When it bought China’s large‑cap “quality” names aggressively, Mainland investors assumed it represented international capital practicing value investing — and they followed its net inflows and outflows as signals. This is the result of years of value‑investing evangelism, echoing Charlie Munger’s “liking/loving tendency” in human misjudgment.

Lately, Mainland investors have noticed that whenever markets go sideways or wobble, northbound capital often flees first. The more alert among them now suspect that part of “northbound capital” is actually Mainland money, levered up in Hong Kong and then routed into A‑shares via Stock Connect.

On April 24, the Hong Kong SFC issued a circular. In brief:

A Mainland bank, via its Hong Kong subsidiary, lent funds through a private arrangement to a controlling shareholder of a certain A‑share listed company, taking that company’s shares as collateral. The shareholder then used the money to repay debts at another listed company he controls.

As with the “anti‑graft storm,” financial cooperation between the Mainland and Hong Kong is tightening. Impostors within northbound flows and trouble‑stirrers will face strict enforcement.

For investing, the key is to hold to your own judgment and avoid herd‑following. Recall 2007: many investors saw Buffett heavily holding PetroChina H‑shares and piled into PetroChina A‑shares at 10× price‑to‑book — with disastrous results. Perhaps Buffett should also have said he bought PetroChina at 0.9× book.

Published at: Apr 25, 2019 · Modified at: Oct 26, 2025