HONG KONG: On Monday (Aug 5) as Carrie Lam, Hong Kong’s embattled chief executive, appeared in public before television cameras for the first time in days in an appeal for order, the Hong Kong Stock Exchange began dropping.
It was hard to know how much of the plunge was down to the yuan breaking through 7 to the dollar, how much was because of the intensifying the trade war between Beijing and Washington, and how much of the drop reflected dismay that Ms Lam had no plan B to reverse a situation on the streets that had been spinning out of control.
Since the close of play on Friday the Hang Seng index has dropped 3.5 per cent, leaving it up a mere 0.5 per cent for the year to date.
THE GOOSE THAT LAID GOLDEN EGGS
Before this month, investors monitoring the Hong Kong Stock Exchange in isolation had little reason to fear the chaos on the streets of Hong Kong. In the past, protests have done little to disrupt the relationship with China, with the territory’s status as a financial centre secure.
Since 1997, investors have seen that status as precious to Beijing. They have assumed Hong Kong would have some sort of immunity from heavy-handed intervention; that the Chinese government shared investors’ optimistic assumptions about Hong Kong as the goose that delivered golden eggs to Beijing.
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Indeed, after the reunification between “the motherland” and Hong Kong, Beijing handled the territory with caution in acknowledgement of its value.
But China no longer views Hong Kong as the valuable window to the global financial world. It has gone from being a highly regarded relative to a rival.
That means the downside for Hong Kong stocks and property, and for its status as a financial centre, is far more than investors may have calculated just a few weeks ago.
In the early 1990s when the mainland was beginning to experiment with listing its state-owned enterprises in Hong Kong’s H-share market, both Shenzhen and Shanghai were in their infancy as stock markets, the yuan was heavily controlled and capital controls strictly enforced.
Today, Shanghai and Shenzhen consider Hong Kong a competitor, not an indispensable ally.
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The newly launched Star tech board in Shanghai is meant to take on both Nasdaq and Hong Kong.
Although conceived before the most virulent friction between China and the US, that tension has given the board a fresh urgency. The new Shanghai board may lack the maturity and the liquidity of its offshore rivals but that is likely to change.
STILL VALUABLE TO CHINA
Moreover, Beijing increasingly sees the desire of mainland firms to list their shares in Hong Kong as a form of capital flight, enabling corporate insiders to sell out and take profits outside China — and at a vastly lower tax rate.
But more than that, the territory has failed to evolve. The most valuable companies in Hong Kong continue to be financial and real estate groups, and the most common formula for wealth creation is to put up a building in a city that artificially controls supply to ensure it never outpaces demand.
For example, when the Greater Bay Area scheme tying Hong Kong closer to the Pearl River Delta was first conceived about two years ago, Pony Ma, the founder of Tencent, put in a rare public appearance in Hong Kong at an event in support of the vision.
Mr Ma chaired two panels. At the first, the only Hong Kong representative was from a property group, New World Development, and at the second, it was a senior executive from Henderson Land Development. Hong Kong’s principal contribution, they both seemed to suggest, was to build physical infrastructure.
That is in sharp contrast to Shenzhen, which has nurtured some of the biggest technology companies in China — including Tencent itself.
In other words, it is on the other side of the border where real value in the region is being generated.
Last year, Shenzhen’s GDP topped that of Hong Kong (albeit narrowly) for the first time, according to China Daily.
“We are already selling down our exposure to the most direct Hong Kong economic proxies, such as property and retail,” said Rahul Chadha, chief investment officer at Mirae Asset Management in Hong Kong last week.
Until recently, there were still arguments to be made in favour of Hong Kong.
For one thing, Hong Kong appeared likely to be the beneficiary of investors’ paranoia about listing their Chinese portfolio firms in the US, where they can easily become hostage to tensions between Beijing and Washington.
For example Chinese tech group ByteDance, which will list early next year, is still deciding whether to float in New York or Hong Kong but is leaning toward the latter.
But the territory is now facing much bigger competition from across the border. Lower US interest rates — which in the past have supported valuations in Hong Kong — may no longer be enough to revive the city’s fortunes.