18 October 2019
Hong Kong's stock market has tumbled amid concerns over the continued plunge in mainland shares.Photo: HKEJ
Hong Kong's stock market has tumbled amid concerns over the continued plunge in mainland shares.Photo: HKEJ

Market tumble to strengthen HK reputation as financial market

Over the past decades, Hong Kong has gained enough experience in dealing with financial crises and stock market tumbles.

It relies on an open market mechanism and comprehensive regulatory regime to maintain order in the market.

But the territory’s stock market on Wednesday suffered its biggest drop since the global financial crisis on account of its close linkage with the mainland stock market, which is on a free fall despite unprecedented measures taken by the government to boost investor confidence.

The Stock Connect, which effectively integrates the local market with that of the mainland, had provided a great boost to stocks on both sides of the border.

Mainland investors found a new venue for their capital, while international funds found a way to widen their stock portfolios.

Things were looking great, until mainland investors, many of whom were borrowing money to buy stocks, decided to cash out. The plunge in mainland stocks naturally spilled over to Hong Kong.

Of course, there were many other factors, like the uncertainties over Greece and its negotiations with creditors, but the main reason for the selloff in Hong Kong is its integration with the mainland market.

Hong Kong has become an automated teller machine (ATM) for Chinese investors to pump cash back to the mainland stock markets to settle their margin financing.

That’s not too bad since Hong Kong has been playing the role of an ATM for the global investors for decades.

But the market tumble should raise concerns over the fact that the Hong Kong and mainland stock markets are operating in different universes.

Hong Kong and international investors are more disciplined and circumspect, while their mainland counterparts treat the stock market like a casino.

The Financial Times on Wednesday reported that Premier Li Keqiang was quite angry over the market meltdown during his visit to Europe last week. When he returned, he cobbled a package of initiatives to rescue the market, which has plunged more than 30 percent since mid-June.

However, the market continued its plunge in the past three days, proving that administrative measures were not enough to support weak investor confidence.

The mainland bourses’ 10 percent daily limit on share price fluctuation, along with the move by more than 1,000 listed companies to suspend trading, only prompted investors to turn to Hong Kong to sell off their holdings.

Beijing has continued to intervene, ordering state-owned enterprises not to shell their shares and to buy more stocks “to safeguard market stability”.

Regulators also relaxed rules on margin trading to encourage more investors to buy stocks, with their loans supported by liquidity promised by the central bank. 

All these initiatives were aimed at pumping new cash into the market, but the selloff continued.

And so if the government cannot encourage investors to buy stocks, its other option is to prevent them from selling their holdings.

And that’s exactly what the China Securities Regulatory Commission did. It ordered shareholders with stakes of more than 5 percent not to sell their shares for the next six months in an attempt to arrest the market plunge.

Some analysts have raised concerns that in the face of increasing government intervention in the market, the market is fast turning into a government tool rather than a venue for companies to raise capital.

That implies that investors will bet on government policies for investment returns, rather than focus on the prospects and performance of companies and the economy.

Stock markets should be allowed to operate on the basis of market principles, whether they are in Hong Kong or the mainland.

In the wake of the economic slowdown, Chinese leaders have hoped that the stock market, because of its ability to generate wealth, would provide the impetus for business growth as well as spur domestic consumption.

The Communist Party also looks at the stock market as an instrument for social stability and harmony. But with the current market turmoil, the impact on society is far from reassuring.

This is why the Chinese government is desperate to try any measures to rescue the market, even to the extent of sidestepping the very principles on which the market is supposed to operate.

Over the past years, the Hong Kong government has been stressing on the importance of Hong Kong’s integration with the mainland, from infrastructure and stock markets to politics and society.

The establishment of the Shanghai-Hong Kong Stock Connect was the result of such a policy, which initially brought cheer to the stock markets on both sides of the border.

But the risks of such an integration had been overlooked, if not ignored. Local brokerages started offering margin financing to mainland investors to buy Hong Kong stocks, and when the market started to fall and the loans became due, the risks began to surface.

Still, the current turmoil is likely to bolster Hong Kong’s reputation as an international financial center, given its strict observance of the rule of law, transparent market mechanism and clear regulatory regime. 

Despite the chaos in the mainland markets, investors in Hong Kong are still able to reap profits from the selloff or buy from dips for future profit.

Chinese investors are now realizing the importance of open market operations; many of them are unable to sell their stocks on the mainland despite the market tumble.

Such a realization will attract more Chinese investors to bet on Hong Kong as they cast a vote of no confidence in their own stock market.

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EJ Insight writer