21 July 2019
There are concerns that Chinese authorities could go slow on financial reforms in view of the recent market turbulence. Photo: CNSA
There are concerns that Chinese authorities could go slow on financial reforms in view of the recent market turbulence. Photo: CNSA

HK market faces further risks as China proxy

Global investors have switched to Hong Kong as Chinese authorities have restricted short-selling activities and share disposals by major shareholders. This has increased the volatility in the Hong Kong market.

Meanwhile, the yuan weakness has rippled into the Hong Kong dollar. As a result, the P/B ratio of the Hong Kong market has slid to 0.96, lower than that seen during the 2008 financial crisis. The ratio is now close to the 0.94 figure witnessed in the wake of the 1998 Asian financial crisis. 

The core issue this time is China’s slowdown and economic restructuring. Beijing’s chaotic policy response has disappointed investor. George Soros has said that a more accurate reading of China’s current economic growth could be 3.5 percent, and he even warned of a hard-landing.

Beijing has opted to drain offshore yuan liquidity and expand fiscal deficit to 3 or 4 percent of its GDP, rather than cutting interest rates to stimulate growth. It is feared that any rate cut would be used by speculators as an excuse to attack the renminbi again.

If A-shares can return to reasonable levels, there is still a chance that they will be included in the MSCI benchmark. However, the recent market turmoil would put a question mark over Beijing’s stance on liberalizing the financial markets.

There are concerns that authorities might go slow on renminbi internationalization and opening-up of the domestic equity and bond markets.

Beijing might want to optimize the market infrastructure and carry out investor education before undertaking any reforms.

If authorities do indeed decide to hold back on market liberalization, financial stocks could take a beating. It will also affect the prospects the Hong Kong stock market operator, Hong Kong Exchanges and Clearing Ltd. (00388.HK).

In the short term, investors should watch whether the Shanghai benchmark index could stabilize at around the 2,500 points level. And whether Beijing will prevent further sharp slide in its currency.

If those things do not happen, hedge funds would attack the Hong Kong market and the Hong Kong dollar again.

This article appeared in the Hong Kong Economic Journal on Jan. 28.

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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