Hong Kong’s stock market is facing a significant decline, with the Hang Seng Index falling below 15,000 points for the first time in 14 months. This downturn has left investors, like accountant Edelweiss Lam, concerned about the future of Hong Kong’s stock market. Lam, who has been investing in Hong Kong stocks since the late 1990s, expressed a sense of unease as the market tumbled “back to square one.” Lam attributes this decline to China’s increasing control over Hong Kong’s economy and the uncertainty surrounding China’s post-pandemic recovery. As a result, investors are redirecting their investments to other markets, causing Hong Kong’s stock market to lag behind.
Since Hong Kong’s return to Chinese sovereignty over a quarter-century ago, the Hang Seng Index has struggled to regain its former strength. Currently, the index hovers below 16,100 points, lower than its level on the day of the handover in 1997. In contrast, stock markets in the United States, Japan, and other popular markets have flourished. Investors who put their money into the S&P 500, a measure of the US market’s performance, have seen their investments grow nearly tenfold since 1997. Lam highlights the impact of China’s government announcements on the market, stating that any new regulations or controls can cause significant fluctuations. The tightening control of Hong Kong by China has made it impossible for investors to ignore China’s actions.
China’s crackdown on various sectors in recent years, such as the implementation of a national security law and increased regulation of corporate giants like Alibaba and Tencent, has contributed to the decline in investor confidence. Many of China’s largest companies are dual-listed in Hong Kong and China, making them significant components of the Hang Seng Index. Furthermore, China’s economy has struggled to recover from the impact of COVID-19 and the government’s strict pandemic measures. Structural issues such as a shrinking population, high local government debt, and a slow-moving real estate crisis have further hindered China’s economic growth. Despite China’s claim to be open for business, foreign investors are becoming less confident. In 2023, China experienced its first drop in foreign direct investment in 12 years, with inflows declining by 8 percent.
The decline in stock markets in China and Hong Kong has prompted investors to turn their attention to other markets, such as Japan and the US. Analysts predict a bullish 2024 for these markets, with the Nikkei 255 Index reaching heights not seen in over 30 years and the S&P 500 closing at an all-time high. George Magnus, an associate at Oxford University’s China Centre, emphasizes the interconnectedness of Hong Kong and China’s markets. While Hong Kong’s economy may no longer be a significant portion of China’s GDP, it still plays a vital role in finance and capital market transactions. Therefore, the bearish sentiment and low stock prices in China have a ripple effect on Hong Kong’s market.
The decline in Hong Kong’s stock market is compounded by the erosion of rights and freedoms guaranteed until 2047 under the “one country, two systems” agreement. Since the passage of the national security law in 2020, Hong Kong’s political opposition and independent media have been significantly suppressed, and numerous arrests related to activism and speech have taken place. The tightening control by Beijing has led to a mass exodus of Hong Kongers, taking their money out of the city. Lam, for instance, has moved her pension fund overseas and plans to sell her remaining stock investments in Hong Kong at a loss. The lack of real action from the government to address the economy has further fueled the crisis of confidence.
To revive both Hong Kong and China’s economies, analysts argue that bolder action is required. Beijing is considering a potential $278 billion rescue plan for the stock market, but many doubt its effectiveness. Memories of a similar rescue plan deployed in 2015 after a tumble in China’s stock market, along with concerns that Beijing will not implement necessary reforms, have led to a lukewarm response to the proposed plan. Alicia Garcia Herrero, chief economist for Asia Pacific at Natixis, highlights China’s limited room for maneuver due to high levels of debt and limited scope of monetary easing.
In conclusion, Hong Kong’s stock market is facing significant challenges as investor confidence in China wanes. China’s increasing control over Hong Kong’s economy, coupled with its struggling post-pandemic recovery, has led investors to seek opportunities in other markets. The decline in China and Hong Kong’s stock markets has prompted investors to turn to markets like Japan and the US. The erosion of rights and freedoms in Hong Kong, along with the lack of bold action to revive the economy, has further shaken investor confidence. While Beijing considers a rescue plan, doubts remain about its effectiveness given China’s current economic challenges.
