The Hong Kong stock market is grappling with the relentless grip of a bear market as foreign funds make a hasty retreat, counterbalanced by an influx of Chinese funds.
This complex interplay has cast a shadow over market sentiment, leading to a palpable decline in enthusiasm among investors.
As the Chinese Communist Party (CCP) follows a suspected policy of “keep Hong Kong but not its people,” observers note that foreign investment, human freedoms, and human capital are leaving the city. Their place is being filled by Chinese investment and repressive rule.
The Hang Seng Index, following its descent below the critical 18,000-point threshold on Aug. 18, embarked on a seven-day consecutive decline, followed by faint signs of an upward trajectory.
However, the slight gains are far from sufficient to rescue the index from the clutches of the bear market. An analysis of the trend through a technical lens underscores the inadequacy of the short-term rebound to trigger any meaningful alteration in the prevailing outlook.
As such, analysts fear that the bearish trend that has engulfed the Hong Kong stock market may persist in the foreseeable future.
As of Aug. 18, the total market capitalization of the Hong Kong stock market had undergone a significant contraction, plummeting from its zenith of HKD 53 trillion in May 2021 to HKD 36 trillion at the end of July 2023. This evaporation of almost HKD 20 trillion (equivalent to around $2,550 billion) over the span of just two years underscores the extent of the market’s turmoil.
The first half of 2023 witnessed a notable decline in the funds amassed through initial public offerings (IPOs) on the Hong Kong exchange. Statistics from financial market data provider Refinitiv showed that a total of 28 companies raised just $2.2 billion in the first half of the year, the lowest funding total since 2003. The 20-year low reflects the challenging conditions that currently prevail.
Looking at the Broader Asian Market
A broader survey of Asian markets underscores the contrasting fortunes of the region.However, the Hong Kong stock market presents a contrasting narrative as it grapples with setbacks. Former foreign investors, who once favored Hong Kong, have recalibrated their positions, redirecting their capital toward neighboring territories such as Japan, South Korea, and India.
Meanwhile, a trend of brokerage closures in Hong Kong is spreading. As of Aug. 1, a staggering 24 brokerages had formally communicated their intention to wind down operations within the calendar year.
As an open offshore market of strategic importance, the Hong Kong stock market has a unique composition. While mainland Chinese listed companies constitute the asset side, the funding facet has traditionally been underpinned by a prominent presence of European and American foreign funds.
Over the years, the Hong Kong stock market has demonstrated a remarkable correlation with the performance of the U.S. stock market, a connection fortified by the currency peg system linking the Hong Kong dollar to its U.S. counterpart.
As ‘One Country, Two Systems’ Erodes, Foreign Capital Exits
The European Commission’s annual Hong Kong Report for 2022, published Aug. 18, revealed a notable 5.2 percent contraction in the number of foreign enterprises in Hong Kong in June 2022, as compared to the pre-pandemic benchmark of June 2019.The trend extended to foreign enterprises headquartered in Hong Kong, with a decline of 12.5 percent during the same period. Meanwhile, the presence of Chinese enterprises in Hong Kong surged 17.5 percent. Mainland Chinese companies listed on the Hong Kong Stock Exchange last year accounted for 77 percent of the market’s capitalization.
Running parallel to this transformation is the ascent of Chinese capital as Hong Kong’s predominant source of foreign direct investment (FDI), effectively constituting 28 percent of the total FDI influx. In a reciprocal flow, China is the first destination for Hong Kong’s outward FDI, totaling 49 percent of total stocks, according to the EU report.
Economic commentator and Epoch Times contributor Alexander Liao places the blame for Hong Kong’s stock market woes squarely on “the drag from China’s economy.” The situation is aggravated, he said, by “the uneasy rapport between China and the United States, and worsened by the gradual erosion of ‘one country, two systems.’”
He added: “This confluence of factors has propelled the exodus of foreign capital from the region, as prospective investors grapple with mounting pessimism concerning the future trajectory of Hong Kong stocks. Such uncertainty has cast a shadow on investment sentiment, prompting a reluctance to commit funds in this milieu.”
‘The New Normal Is a State of Fear’
In early July, Hong Kong police offered a reward of 1 million Hong Kong dollars for each of eight fugitives wanted for “endangering national security.”The city’s chief executive John Lee vowed to hunt the pro-democracy activists “for life.” Their assets and bank accounts were frozen.
Entrepreneur Yuan Gong-yi, one of the fugitive activists, blamed the CCP for dismantling the British legal framework that underpinned Hong Kong’s legal system, thereby creating an environment of insecurity and fear. In response, he said, capital is fleeing the island city.
“A call from national security, asking the bank to freeze someone’s money, and the bank has to comply,” Mr. Yuan commented in a YouTube video. “If the bank does this, then they needn’t expect to have any customers left—they will all leave.”
An anonymous Hong Kong resident, speaking to The Epoch Times on Aug. 21, lamented the diminishing rule of law that followed the implementation of Hong Kong’s national security law in 2020.
“The new normal is a state of fear that dissuades outspokenness, as even words can lead to charges.” If someone says the wrong thing, their bank account can be frozen “with a sentence,” he added.
On Aug. 19, the Chinese foreign ministry’s Hong Kong office issued a strong response to the EU report. The embassy spokesperson alleged that the rule of law and the business environment in Hong Kong have actually shown improvement in the three years since the national security law’s enactment, asserting: “The rights and freedoms enjoyed by Hong Kong residents under the law, including speech, press, and association, are better protected in a safer environment.”
Belying his words, since the inception of the national security law, numerous independent media outlets in Hong Kong have ceased operations. Journalists have been arrested, charged, and detained before trial.
During two decades under the “one country, two systems” framework, Hong Kong continued to adhere to the common law system rooted in the Anglo-American tradition.
Despite the crackdowns of the last few years, CCP leader Xi Jinping continues to insist that the “one country, two systems” policy is still effective, calling it a system “that must be maintained over the long term.”
However, the imposition of the national security law bypassed Hong Kong’s judicial framework entirely and exerted its dominance over the common law, sparking concerns among Hong Kong residents and foreign investors alike.
