21 October 2016
Hong Kong stocks tumbled on Monday amid fears that Greece will exit the eurozone. Photo: Reuters
Hong Kong stocks tumbled on Monday amid fears that Greece will exit the eurozone. Photo: Reuters

Grexit may be good for everyone

The Hong Kong market tumbled on Monday, apparently thwarting market expectations of a rally in July.

Meanwhile, the mainland market plunged due to the government’s aggressive deleveraging moves. The sell-off continued even after the Chinese central bank deployed another interest rate cut and reduction in the banks’ reserve requirement ratio over the weekend.

Investors are staying on the sidelines amid fears that Greece is poised to default within this week.

Chinese authorities are set to ramp up efforts to buoy market sentiment in the short term. The market is likely to stage a modest rebound after the excessive sell-off.

However, investors should be more cautious amid heightened market volatility.

Global bonds, equities and foreign exchanges slumped on fears of a possible Grexit. Prime Minister Alexis Tsipras made a shock announcement on June 26 that the nation will launch a July 5 referendum on austerity measures demanded by the country’s creditors.

If Greece is forced to leave the eurozone, market turmoil is sure to follow. But that won’t be “black swan” event for the market.

Both parties have tried to avert Grexit as Greece is valuable to Russia from the geopolitical perspective. That’s also a trump card Athens is playing in its talks with creditors.

But the creditors have come to realize that it’s better to suffer short-term pain rather than long-term torture after years of lengthy bargaining. The Grexit could actually benefit the eurozone in the long run as other nations like Italy may not follow the bitter example of Greece.

The People’s Bank of China on Saturday cut the one-year benchmark bank lending rate by 25 basis points to 4.85 percent, and lowered the amount of reserves certain banks are required to hold by 50 basis points.

I believe there is room for another interest rate cut of 75 basis points given the deflationary pressure. It remains unclear how the monetary easing measures have helped in bolstering real economic growth.

It seems that massive capital has flowed into the stock market during the first half of the year.

The move to tighten rules on margin financing and short selling has put an end to roller-coaster trading. But it immediately triggered panic sell-off on the mainland market.

The market correction has been extended due to the daily down-limit. The government move could lead to a “hard landing” for the bull market as a result of the dominance of retail investors.

I’ve noted before that the Hang Seng Index is likely to extend its traditional rally in July as it did for the last decade.

However, that depends on whether Beijing will unveil further stimulus measures to restore market confidence, such as lowering the stamp duty, allowing pension funds to access the stock market as well as the launching of the mutual fund recognition scheme between Hong Kong and the mainland.

Foreign investors are also reviewing A shares after the recent market tumble.

This article appeared in the Hong Kong Economic Journal on June 30.

Translation by Julie Zhu

[Chinese version中文版]

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columnist at the Hong Kong Economic Journal

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