28 October 2016
Chinese retail investors remain largely confident in the government’s ability to save the stock market. Photo: Reuters
Chinese retail investors remain largely confident in the government’s ability to save the stock market. Photo: Reuters

Hong Kong shines amid mainland stock market crash

China has spared no effort to support the stock market. It has done everything to halt the market sell-off, including preventing short-selling on the futures market, prohibiting major shareholders to reduce holdings, suspending new initial public offerings, etc.

On the demand side, a number of mainland brokerages, mutual funds and various listed companies have been required to buy stocks. As a result, A shares have managed to rebound around 4,000 points.

However, foreign investors are fleeing the mainland market. By contrast, most retail investors remain confident in the government’s ability to save the stock market. Beijing has to take drastic measures to stop the sell-off by a massive number of individual investors.

It’s quite obvious that the rally of A shares is mainly policy-driven. Still, many fund managers have opted to take profit.

Meanwhile, the MSCI might delay the timetable for adding A shares to its Emerging Market Index in light of recent government interventions.

As a result of accelerated efforts in boosting economic growth, China’s M2 growth has hit a record high of 11.8 percent in May, and new loans have reached 1.27 trillion yuan (US$204.58 billion). The country’s economic recovery will lend support for the stock market.

However, foreign investors may favor the Hong Kong market over the mainland market, given that the former is a free market where they can short-sell and hedge very easily. That could further cement Hong Kong’s status as a global financial hub.

Greek crisis

As we know, poor countries have little leg room in their foreign policy. Greece’s debt issue could be a timebomb ticking away in the eurozone.

The European Union has demanded more stringent austerity measures from Greece to ensure that the debt-laden country could meet its obligations, but mutual trust has been broken when Greece called for a referendum.

On July 5, the Greek citizens rejected the bailout terms laid out by the creditors. They looked up to Prime Minister Alexis Tsipras as a national hero. But within a week, Tsipras caved in to the lenders’ demands.

The European Central Bank halted the emergency funding to Greek banks, paralyzing the country’s banking system immediately. Therefore, the Tsipras government had to accept the bailout terms.

Germany played hard ball. It drafted back-up plans including debt purchasing and monetary easing to offset the impact from a possible Grexit. This tact worked well to Germany’s advantage. It also served as a warning to other European nations like Italy and Spain, which may be thinking of following Greece’s example.

The new bailout terms are not only stringent but also very detailed. Greece accepted reforms such as significant pension adjustments, increases to value-added tax, an overhaul of the collective bargaining system, measures to liberalize the healthcare, dairy and food sectors, and tight limits to public spending.

It has to repay its debts in line with a set timetable and lose control over government spending.

These measures will be fiercely opposed by Greek citizens who are facing pension cuts, higher taxes and unemployment.

Tsipras made it clear that he was supporting the package against his will but there was no other option left for Greece to avoid financial meltdown.

This article appeared in the Hong Kong Economic Journal on July 16.

Translation by Julie Zhu

[Chinese version中文版]

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Founder and Managing Director of Pegasus Fund Managers Ltd.

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