Analysis-China holds the key to Hong Kong’s shrinking stock market

By Summer Zhen and Xie Yu

HONG KONG (Reuters) – Hong Kong’s efforts to revive its shrinking stock market are mere stopgap solutions, as analysts say a reversal in fortunes for Asia’s premier financial hub would not be possible without a major improvement in China’s economic prospects.

Hong Kong’s government has for months tried to boost turnover and revive a torpid stock market, the latest coming on Wednesday when its leader John Lee announced an immigration plan tied to investments and a cut in the stamp duty on stock trades.

But the region’s key financial centre and gateway to the world’s second largest economy is a shadow of its former self as foreign investors reduce exposure to a China they view as increasingly isolated by its opaque policies, struggling property sector and crackdowns on private enterprise.

With a market value of around $4.3 trillion, Hong Kong is home to one of the top-ranked stock markets globally just behind those in the United States, Japan, China and Europe.

But it compares poorly on turnover, with a daily average of $11.3 billion between January and June compared with $261 billion for Nasdaq, $27.9 billion for Japan and $77.9 billion for China’s Shenzhen exchange. New share offerings in Hong Kong have fizzled.

Dickie Wong, executive director of research at Kingston Securities, said the stamp-duty cut was in line with expectations.

It might spur a “short-lived rebound” in the Hong Kong stock market, he said, but longer-term issues such as the exodus of foreign investors and the tensions between China and the United States would remain an overhang.

The Hang Seng stock index and the Hang Seng China Enterprises Index are down more than 11% each this year.

The HSI hit a 22,700.85 peak in late January and is currently around 17,000. Daily turnover has fallen below HK$80 billion on numerous occasions since the second quarter, halving from an average of HK$160 billion in 2021.

“Liquidity is clearly down due to foreign investors reducing exposure to China, since many investors, ourselves included, access China shares from Hong Kong,” said Rob Brewis, a portfolio manager at UK-based asset manager Aubrey Capital Management.

“I suspect it is due to the perception of worse prospects in the Chinese economy as well as enhanced political risk. The only solution to this is just a reversal of these trends, i.e. better economy and better foreign relations. There is no easy answer.”

Eddie Tam, CIO of Hong Kong-based Central Asset Investments, also reckons funds are not done cutting exposure to China, and foreign investors “are not nearly finished with the selling off of Hong Kong stocks.”

China’s economy has stumbled this year after a brief post-COVID bounce, with growth hurt by a protracted property crisis, elevated debt levels and sluggish demand.

BROKERS BEMOAN

The decline in volumes has been dire for Hong Kong’s hundreds of small hole-in-the-wall brokerages. Local media reported that a record 47 of the 638 trading participants on the Hong Kong exchange shut shop last year.

Chinese firms listed in Hong Kong, such as tech giants Tencent and Alibaba (NYSE:), comprise the bulk of the turnover on the Hong Kong exchange, leaving Hong Kong hostage to China’s fortunes.

Alvin Cheung, associate director at Prudential Brokerage whose main businesses include retail investors’ securities broking, margin financing and IPO subscriptions, said his industry is “very quiet” now and he has been “worrying about our business sustainability for a while”.

“The current trading volume is extremely low, and investors are reluctant to buy because they see no other investors participating. The willingness to invest has reduced sharply,” said Cheung.

That is dampening stock prices, “so we see the going from 20,000 to 18,000 to 17,000.”

“Market sentiment is even worse than 2008,” said Alex Wong, a partner of Alex KY Wong Asset Management Company, referring to the Global Financial Crisis.

“At that time, everyone still believed in passing through the cycle. The problem this time is many people are worried about a balance sheet recession (in China),” said Wong, who has been investing in the city for over 30 years.

Local investors who’d been buying in Hong Kong for many years were feeling discouraged, while the younger generation was more into trading U.S. stocks, he said. “It’s very difficult to attract new money, so you have a structural problem”.