Risks are mounting for Hong Kong’s stock market, the world’s fourth-largest, after the biggest plunge for the benchmark gauge in five years.
China’s shock decision last week to impose a law cracking down on dissent has led to a flare up of protests in the territory, sparked concern over capital outflows and increased tensions with the US.
That has placed Hong Kong, and its financial markets, on the front lines of a growing clash between the world’s two largest economies.
The Hang Seng Index plummeted 5.6 percent on Friday, its worst drop since July 2015, when a bubble popped in China.
A gauge of real-estate companies sank the most since the global financial crisis, underscoring concern over whether investors will shift assets overseas, especially given sky-high prices for property.
Currency traders piled into derivatives that profit from Hong Kong dollar weakness.
The slump left the Hang Seng trading at 9.5 times reported earnings, about half the multiple of MSCI Inc’s global index and the biggest discount since 2016. Few benchmarks trade at single-digit valuations; those that do are mostly frontier markets such as Colombia, Argentina and Sri Lanka.
The Hang Seng Index closed up 0.1 percent yesterday, while the MSCI Hong Kong Index slid 0.4 percent, taking its two-day decline to 7.2 percent.
For global investors, the question is whether such distressed levels are worth betting on.
Those who called for a rebound in March — when the gauge traded below book value for only the third time in history — are now looking at similarly depressed valuations.
The Hang Seng is back below that level, with traders pricing firms’ assets at 95 percent of their stated worth.
The territory has a reputation for bouncing back, whether it was the global financial crisis, SARS in 2003, or riots in the 1960s.
However, its stock market faces a series of pressures that are hard to ignore right now. How the US responds is a major concern.
US Secretary of State Michael Pompeo on Friday indicated that the US would reconsider exemptions that shield Hong Kong exports from tariffs that apply to Chinese goods if Beijing moves forward with its national security law.
The planned crackdown adds peril for Hong Kong Exchanges & Clearing Ltd (HKEX) chief executive officer Charles Li’s (李小加) vision for the exchange to become a gateway to China, just as his plan was starting to gain momentum.
Li has pushed through a number of changes to lure more of China’s corporate giants to list in the territory, away from New York. A US Senate bill unveiled last week was seen as adding further momentum to the push.
Before Friday “it was clear that the US-listed Chinese companies could come back and raise funds in Hong Kong,” said Castor Pang (彭偉新), head of research at Core Pacific-Yamaichi International Hong Kong (京華山一). “Now frankly no one can be so sure.”
Reforms over the past years have allowed HKEX to attract Chinese tech behemoth Alibaba Holdings Inc (阿里巴巴) to do a US$13 billion dual listing last year.
Companies such as JD.com Inc (京東) and NetEase Inc (網易) are planning to follow suit next month.
Wumei Holdings Inc (物美控股), the Chinese retail group that owns one of the country’s biggest supermarket chains, is also considering an IPO in Hong Kong, people with knowledge about the matter said.
Wumei owns grocery operator Wumart Stores Inc (物美商業集團) as well as the local operations of home-improvement chain B&Q. Last month, it completed the acquisition of an 80 percent stake in German wholesaler Metro AG’s Chinese unit, the people said.
Companies have raised only US$3.2 billion through IPOs in Hong Kong this year, putting it in fifth place behind exchanges in mainland China and New York, according to data compiled by Bloomberg.
The big question now is over the fallout of the Chinese security bill, in particular if it will affect the movement of capital, and any potential US blowback.
Hong Kong is for now still seen as largely insulated from the US-China turmoil and has the proper legal framework to protect investors’ rights, said Louis Tse (謝明光), a Hong Kong-based managing director of VC Brokerage Ltd (匯盈證券).
Maintaining that confidence will be key since the bourse will need major institutional investors in Europe and the US to take part in big IPOs returning from New York, Tse said.
“There will be measures to soothe the harm done to the Hong Kong market,” he said. “One doesn’t kill the goose that lays the golden eggs, right?”
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