It’s widely debated whether the Hang Seng Index can hit 30,000 points again. In fact, I was asked the same prospect 10 years ago when China floated the so-called through train scheme in August 2007.
Unfortunately, the through-train scheme failed but it pushed the Hong Kong market to unprecedented heights.
In recent years, Shanghai-Hong Kong Stock Connect, Shenzhen-Stock Connect, and mutual fund recognition have been launched. Nevertheless, the Hong Kong market has failed to return to the previous peak of 32,000 points. Some said the Hang Seng Index might revisit 30,000 due to ample liquidity.
The Federal Reserve is expected to slow its pace in hiking interest rates. And massive mainland capital will be parked in China after Beijing imposed a tight grip on outbound M&A deals. In fact, some cross-border deals are being undertaken without proper due diligence.
Mainland capital would seek opportunities in Hong Kong’s property and stock markets. However, it remains unclear how long the capital inflow will be sustained.
There are signs that the stock market is peaking, although global central banks are in no hurry to tighten monetary policy. The Hong Kong market may edge higher in the future, albeit with various ups and downs. It remains to be seen whether mainland capital inflows will be sufficient to support the broader market.
The Hong Kong and mainland markets are closely linked, and the former serves as a placeholder for mainland capital.
The mainland market has suffered heavy sell-offs for fear of tighter risk controls. The recently concluded National Financial Work Conference put top priority on risk, which appeared 31 times in the official reports. Regulation was mentioned 28 times, while “development” and “reform” took a back seat. Besides, the word “tight” appeared six times, and it appeared whenever regulation was mentioned.
I believe the Chinese authorities will maintain their stance that financial institutions should strengthen their ability to serve the wider economy and stop being distracted from their intended purpose.
The government will unveil measures soon to build a multi-layer capital market system and allow financial institutions to serve the real economy, in order to open up new financing channels.
More importantly, the authorities would strive to facilitate financing for micro and small businesses as part of efforts to push economic restructuring and industry upgrade.
Currently, indirect financing continues to dominate the market in China. The authorities are keen to ramp up the ratio of direct financing as well as optimize indirect financing. Big state-owned banks will deepen reform, while smaller banks and private financial institutions will play a bigger role.
Hong Kong should be more proactive as China’s global financial center. For example, Hong Kong should not be satisfied with the role of safe heaven for mainland capital. Instead, it should assist China’s reform agenda and safeguard the nation’s overall interests.
In that sense, mainland capital may not stay in Hong Kong for a long time. And the bull-market cycle supported by southbound capital may not be sustained for long. I’m skeptical that the Hong Kong market will return above 30,000 points.
This article appeared in the Hong Kong Economic Journal on July 24
Translation by Julie Zhu
[Chinese version 中文版]
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