Under Chinese rule, Hong Kong’s stock market has more than tripled. That’s still below Shanghai.
Hong Kong’s benchmark stock index has earned a total return of more than 230 percent since delivery in July 1997. That compares with 320% of the Shanghai Composite Index and 580% of the S&P 500 Index in the United States.
Underperformance has accompanied Hong Kong’s shift from a place. The place, dominated by local real estate developers, banks, and utility giants. It shifts to a place that is now tied to mainland China and Xi Jinping’s vision for the nation.
The shift has provided enormous opportunities for investors to take advantage of China’s economic rise. But it has also brought a cycle of booms and busts, and staggering risks. staggering risks weren’t appreciated until Beijing’s sweeping regulatory crackdown. The crackdown was on private enterprise over the past year and a half.
Onshore companies now account for two-thirds of the shares listed on the Hang Seng index. The Communist Party under Xi reaffirmed its hand in the markets. Here are some charts looking at how mainland companies have come to dominate the city’s stock market and what it means for investors.
Winners and Losers
Stragglers
The Hang Seng Index has underperformed most of its peers since the trade-off.
Hong Kong’s relative underperformance has been more acute. It is since late 2020 when Chinese regulators suspended the listing of Jack Ma’s Ant Group Co. and began a crackdown on many of the tech giants that have made their home on the city’s exchange.
Three of the six largest stocks by market value today come from this sector leaving it vulnerable to pressure from the dictates of Xi. Xi wants Chinese companies to wrest technological supremacy from the United States. It is while doubling down on their business models toward their goal of “common prosperity.”
Highlighting the dangers for buy-and-hold investors, e-commerce heavyweight Tencent Holdings Ltd. has seen its market value drop from a high of around $1 trillion last year to less than $450 billion.
Big Tech. Big Risk
New Era
Technological growth has reshaped the Hang Seng Index
The current turmoil is not unique to Hong Kong’s actions. PetroChina Co. suffered a similar fate to Tencent’s. Tencent’s going from being a $1 trillion market favorite in 2007 to $138 billion. The journey, after the government moved away from commodity-intensive development.
“Unfortunately, I would think that if we talk about Chinese tech companies in Hong Kong or just Chinese companies in general in Hong Kong, in my opinion, they will probably continue to go through the boom-bust cycle,” said Jian Shi Cortesi, Zurich-based chief investment officer at GAM Investment Management.
Boom and Bust
That said, he remains optimistic about the long-term outlook and sees big opportunities in Hong Kong stocks. Because Hong Kong stocks have started to rise again after hitting a nadir in March.
“We’re seeing a lot of companies trading at multi-year low valuations,” Cortesi said, adding that some had fallen as much as 90%.
The continent dominates
Red flag
The number of companies in each area in the Hang Seng Index
Hong Kong Exchanges and Clearing Ltd. CHIEF Executive Nicolas Aguzin is also unperturbed. He expects China’s onshore stock and bond markets to more than triple to more than $100 trillion over the next decade. It will bring huge potential for the market operator to expand.
“We have a unique position that is next to the biggest opportunity in the world,” Aguzin told Bloomberg last month.
One of the great successes of the exchange has been the trade link between Hong Kong and Shanghai. It was added at the end of 2014, followed by another with Shenzhen in 2016. Since then, domestic Chinese investors have become a new Hong Kong stock trading force, accounting for more than 10% of daily turnover.
This year under Aguzin, the stock exchange received the go-ahead from Beijing to include exchange-traded funds in the stock connection program to take advantage of the demand for passive investments, starting July 4.
Onshore money flows
It is also betting that more mainland companies will be listed in Hong Kong and that Chinese companies kicked off U.S. exchanges will move to the city.
“With tensions rising between Beijing and Washington, Hong Kong will benefit as Chinese companies seek alternative and politically safer places closer to home,” said Hyde Chen, managing director and head of the investment strategy, at Haitong International Asset Management in Hong Kong.
However, he’s not playing that way yet. The torrent of stock sales that saw some 2,300 companies listed in Hong Kong since 1997 has slowed to a trickle, Bloomberg data shows.
Share Sales
IPO Drought
Hong Kong depends on the mainland for new listings
Money raised in new stocks valued in the city since the beginning of January is down about 90% from the same period last year, compared with a drop of around 70% for IPOs worldwide and a 29% decline in Asian exchanges.
Meanwhile, activity on continental exchanges has remained strong, with total revenue collected around 10% this year, according to the data.
“Long seen as the West’s window to China, a convenient but more predictable and secure base from which to conduct business, Hong Kong now increasingly serves China’s window to the West,” said Brock Silvers, chief investment officer at Hong Kong-based private equity firm Kaiyuan Capital. “The inextricable economic link between Hong Kong and the mainland carries benefits, but it also transfers risks.”
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