Strong support for Hong Kong stocks from mainland Chinese buyers boosted the Hang Seng benchmark index to a seven-year high yesterday.

After lunch the daily southbound quota under the Shanghai-Hong Kong Stock Connect scheme, permitting mainland investors to tap Hong Kong stocks, hit its Rmb10.5 billion ($1.7 billion) limit for the first time, helping to push the Hang Seng index up by 3.6% to close the day at 26,236 points – a level not seen since 2008.

Daily turnover on the Hang Seng hit an all-time record at HK$252 billion. This increase in traffic is remarkable, with usage of the southbound channel averaging less than 10% as recently as last month.

Paul Chan, Hong Kong-based Asia Pacific CIO at Invesco, said the rally was ignited by mainland liquidity, with the China Securities Regulatory Commission (CSRC) having given the go-ahead for mainland China funds to tap stocks listed across the border just two weeks ago.

Chan noted that much of the liquidity was targeted at Hong Kong-listed mainland shares, which are currently trading at a 28% discount to their Shanghai market equivalent.

Year-to-date, the Hang Seng has gained more than 12%. While it has outperformed major world indices, including the S&P 500 at -0.2%, Hang Seng's gains are still modest in comparison with Shanghai’s A-share market, which has advanced 24% over the same period.

However, the sudden gains in Hong Kong could mean it may be importing volatility from the mainland, where investors are known for a short-term mentality – a point acknowledged by Chan.

A Bloomberg study has found that 30% of new equity investors in China have elementary education or less, with 5.8% classed as “not literate”. Only 5.7% of new investors have an undergraduate degree.

“That’s the price we pay for allowing Chinese liquidity into Hong Kong’s market,” said Chan. “Now, mainland investors realise that Hong Kong has no daily limit [on price movements], so we have seen a lot of small-cap shares going much higher than the 10% trading limit [that would have been imposed in mainland China].

“The question is whether the A-share market will pull back or whether H-shares will continue to catch up,” said Chan. “We have had record turnover since the [southbound fund allowance] announcement. We have seen many up days and I haven’t seen any pullback for the Hang Seng index and the Hang Seng China enterprises index."

Amongst the stocks hitting 52-week highs were Hong Kong Exchanges and Clearing, which advanced 12% to 220 points yesterday alone.

Chinese Railway groups China CNR Corp and CSR Corp rose 42% and 45% respectively yesterday after the Chinese government approved their merger.