Get 40% Off
⚠ Earnings Alert! Which stocks are poised to surge?
See the stocks on our ProPicks radar. These strategies gained 19.7% year-to-date.
Unlock full list

Hong Kong’s Stock Market Reopens to a Changed Reality Under Law

Published 07/01/2020, 08:42 PM
Updated 07/01/2020, 09:27 PM
© Reuters.  Hong Kong’s Stock Market Reopens to a Changed Reality Under Law

(Bloomberg) -- Investors in Hong Kong’s stock market now need to factor in a substantially altered political and legal environment.

The city’s businesses reopen on Thursday after the July 1 holiday which saw the dramatic imposition of national security legislation. The new laws, drawn from mainland China’s system of governance, complicate the city’s reputation as a place with a robust rule of law. They will also likely ignite concern about capital flight, especially after Boris Johnson’s government said it will allow millions of Hong Kong citizens to move to the U.K.

The city’s financial markets have been resilient to the crackdown, although no one had seen the contents of the legislation until Tuesday evening. While the Hang Seng Index sank the most in five years the day after the planned law became public knowledge, the benchmark took less than two weeks to recover from that shock. The gauge is almost exactly where it was before China’s move to crack down on dissent in the city was first reported, with cheap valuations and steady inflows from mainland-based investors supporting local financial markets.

The Hong Kong dollar is also showing few signs of stress -- trading near the strong end of its trading band against the greenback. Its 12-month forward points have dropped since spiking to the highest level since 1999 in May, showing demand to speculate against the currency is also waning.

There are clear signs that Beijing intends to prop up Hong Kong’s financial system through inflows and a flood of stock listings by mainland companies. Whether that support will be enough to maintain (or replace) the confidence of the global business community will need to be seen.

Investor confidence remains muted. The Hang Seng is in a bear market even as stocks in the U.S. and a benchmark of Asian shares recovered. Hong Kong equities lost almost 7% in May, the biggest drop relative to the MSCI All-Country World Index since the Asian financial crisis in 1998. That made the Hang Seng so cheap it still trades below book value, meaning traders are pricing firms’ assets at less than their stated worth.

Hong Kong’s economic outlook is clouded. The coronavirus pandemic has halted the daily influx of mostly mainland Chinese shoppers, hurting retail sales. The city’s wider economy contracted 8.9% in the first quarter from year-ago levels, suffering its worst quarter on record and extending the first recession in a decade.

With the new laws creating doubt over what could land people in trouble, global businesses will need to reassess Hong Kong’s attractiveness as a financial center. Further retaliation by the U.S. could also place the city even more firmly on the frontline of a battle between Beijing and Washington. All of which makes investing in Hong Kong assets a gamble on an increasingly uncertain future.

©2020 Bloomberg L.P.

Latest comments

Foreigners cant buy chinese listed stocks. Chinese companies either list on hk or usa exchanges to get money from foreigners. All money from the west investors inrich china.
For years hk raise money for chinese companies from foreign investors. The question now is if foreign investors money keep continue to pour in?
Hong Kong will flourish under the new law. China is moving $20B in already. The people feel much more safe, the atmosphere is ripe for businesses to return to growth. The Rioters are disbanded. Things is looking very good now.
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.