28 October 2016
A sustained rally in the Hong Kong stock market could work to Beijing's advantage prior to a Legislative Council vote on its electoral reform package. Photo: HKEJ
A sustained rally in the Hong Kong stock market could work to Beijing's advantage prior to a Legislative Council vote on its electoral reform package. Photo: HKEJ

Could Beijing be the invisible hand behind HK stock bull run?

Immediately after the Easter holidays, the benchmark Hang Seng Index embarked on a spectacular streak, surging a combined 3,530 points in the rally that started March 30 until retreating Tuesday this week.

The Hong Kong stock market is now worth more than at any time in the past: its capitalization climbed to $30.55 trillion (US$3.94 trillion) Monday.

Hong Kong replaced Tokyo as the biggest market after New York and mainland China (Shanghai and Shenzhen combined).

Hong Kong Exchanges and Clearing is riding the freewheeling rally, its share price gaining 65 percent in just 10 trading days. The exchange operator is now No. 1 in the world by market value.

On the surface, the gain is said to have been triggered by inflows of funds via the Shanghai-Hong Kong Stock Connect.

But it is hard to explain the large gap between the program’s daily net purchase limit and trading volume on the local bourse.

Net southbound trade on Stock Connect is capped at 10.5 billion yuan (US$1.69 billion) per day, while the exchange’s daily turnover exceeded HK$300 billion in recent days.

And on some days, the program’s quota for Hong Kong stocks was far from being used up.

On Monday, for example, less than 2.5 billion yuan of mainland capital flowed across the border through that channel.

When asked, HKEx chief executive Charles Li Xiaojia said there is no need, and indeed it would be impossible, to trace the money to its source.

Li may not be hiding anything, but could it be possible that Beijing — via other means that are either out of sight of the Hong Kong government or so sensitive that the local watchdog does not want to make public — has been pumping in capital to fuel a stock bonanza in Hong Kong?

Beijing could be doing this because it wants to maintain social stability in Hong Kong, using the stock market as a “policy tool”.

A few conspiracy theories look quite plausible.

Some argue that Beijing has a political motive in creating a local rally to appease the public and shore up sentiment amid the bitter wrangles over universal suffrage.

The stock market’s “wealth effect” could boost consumer spending and, to some extent, stop the feuding and alienation from tearing Hong Kong further apart.

Now, if the Legislative Council passes the 2017 electoral reform proposal as Beijing wishes, the politically driven inflow of funds may continue, to sustain the positive mood.

But if the proposal gets voted down by the pan-democrats, the flow of funds from the north may suddenly cease, triggering a sell-off frenzy, and local investors will have to suffer a sudden plunge in stock prices.

They will then need a common scapegoat, and the pan-democratic camp will have to bear the blame.

As a result, many voters who are investors in the market will vote out pro-democracy candidates in the next election.

Another theory is that the rally may be partly driven by money laundering.

It is no longer easy to launder money through Macau as the anti-graft campaign rages on. So, the Hong Kong stock market could be a nice alternative.

Dirty money and bribes can be washed clean as big wins from investment bets, and officials can legitimately pocket the gains.

The recent “one person, multiple accounts” liberalization has made it easier for corrupt Communist cadres to transfer and whitewash their shady wealth through investing in stocks.

This article appeared in the Hong Kong Economic Journal on April 14.

Translation by Frank Chen

[Chinese version 中文版]

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A famous Hong Kong writer; founder of the Hong Kong Economic Journal

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