Ever since the British hand-over of Hong Kong in 1997, mainland China’s influence on the region and its stock market have been increasing. With only 4% of companies listed in the city back then domiciled in China, this has risen to 30% of the stock-market today.
The exchange is benefiting from US – China tensions as blue-chip Chinese companies take out ‘insurance policies’ in the form of secondary listings. This includes firms that originally floated on Wall Street such as internet groups NetEase and JD.com, who have raised billions of dollars in secondary listings in Hong Kong. They could soon be joined by Baidu, another Chinese tech giant, and Yum China, which operates KFC and Pizza Hut restaurants in China. Additionally, the US Senate passed a bill in May that could force Chinese companies from US exchanges if they do not comply with US accounting standards and so the Hong Kong exchange (HKEX) could benefit from a transfer of these listings too. The HKEX, which suffered a humiliating defeat in its unsuccessful bid for the London Stock Exchange (LSE) last October, has also won lucrative futures contracts, awarded by index provider MSCI, from its local rival, the Singapore stock exchange (SGX), lifting its trading volume in these products by up to 30%.
In recent months, however, the mood music has been changing. President Xi Jinping’s assertive policies have caused a steep loss in popularity and suspicion of China. A recent poll by the Pew Research Center, in their Global Attitudes Project, showed a steep fall in those with favourable views of the region, declining on average 20% over the last 5 years to around only 30% of Europeans, 20% of Indians and just 10% of Japanese. This follows a number of border and air space disputes, state hacking allegations, as well as the Huawei issue.
In the last few days, China has imposed its national security law, following which there have been some heavy handed reactions to locals resistance to the measures that have grasped world press attention, including jail terms and fines against companies that do not comply or co-operate with police requests, albeit it is not clear how this might be implemented with regard to firms executives. On Monday the Hong Kong authorities particularly specified publishers, internet service providers and social media companies. In reaction, Facebook (which incorporates WhatsApp and Instagram), as well as Google and Twitter, all said they will temporarily block Hong Kong’s authorities from accessing user data citing concerns in respect of the freedom of people to express themselves ‘without fear for their safety’. The law imposes restrictions and obligations on social media platforms requiring them to take down content now deemed illegal and to cut user access if a warrant is granted. China’s very own Tik Tok social media app, with 2 billion users world-wide, does not store users data in China and decided to stop its operations in Hong Kong altogether for the same reasons.
Meanwhile, western governments ponder their own responses. In May, US president Trump ordered the main US federal pension fund, the Federal Retirement Thrift Investment Board, not to invest in Chinese companies, something historically carried out through Honk Kong. More recently, his top advisers were considering plans to undermine the Hong Kong currency peg to the US dollar causing HSBC to be caught up in a political tug of war and indeed the whole Hong Kong banking system. Given the mechanism of the peg, the exodus would push interest rates higher, potentially precipitating a crash in the local real estate market, the world’s most expensive and putting local banks at risk of failure with snowball consequences.
Nevertheless, China today is back in a bull market with a year to date gain in its CIS 300 index of 16.3%, comparable with the US’s similarly technology heavy NASDAQ, despite having very few international investors as trade wars, the pandemic and Hong Kong worries have kept the foreign money away. In Asia, investors psychology is to invest in what has already been successful and not what has become cheap through lack of press attention and so the momentum of this bull market in China could run for a while, particularly in an environment where it appears to have placed the worst of the pandemic firmly behind it, interest rates and the oil price are low and the US dollar is no longer rising. With Xi Jinping owning the problem of Hong Kong, and the importance now attached from a credibility point of view, it would seem that he will overcome and exploit the erratic behaviours from the US administration and the disjointedness of Europe to make Hong Kong a continuing success as the Asian financial centre of choice.