Hong Kong markets and charts

The Hang Seng Index has been the worst-performing stock market in Asia this year amid concerns over anti-sanctions law.

At the start of 2021, Hong Kong was the best-performing stock market in Asia, undermining concerns that China’s tough new national security legislation would hinder the territory’s position as a global financial centre.

In January, Hong Kong’s Hang Seng Index grew 6.4%, while the MSCI Asia Index, which covers developed and emerging market countries in the region, increased 3.9% during the month. However, the Hang Seng has now fallen 11% year-to-date, while the MSCI Asia Index has maintained the same growth rate.

“Investors have become more sensitive to policy risks,” says Gary Ng, senior economist at Natixis and co-author of the report, ‘From Hero to Zero: Why Hong Kong equity performance is the weakest in Asia’. “Hong Kong now has the weakest market sentiment in Asia, prompting capital outflows from both foreign investors and mainland China.”

When the Beijing government implemented its national security law in Hong Kong in June last year, it made assurances that rule-of-law concerns did not apply to the territory’s financial sector. A surge in capital inflows — led by Chinese tech firms and real estate groups — in the second half of 2020 suggested that many investors accepted this was the case.

Financial firms in Hong Kong could be squeezed between two regulators

Gary Ng, Natixis

“In the light of the US regulatory threat, Chinese tech companies sought secondary listings in Hong Kong, which drove massive inflows,” Mr Ng says. “The mood changed about Hong Kong’s future from being extremely bearish [following the introduction of the national security law] to a feeling that nothing has changed.”

The impression that Hong Kong would maintain its position as a global financial hub was also bolstered by leading Western banks, including Citigroup, Standard Chartered and HSBC, announcing plans to significantly ramp up their operations in the territory. 

The Chinese tech giant Ant Group was set to list in Hong Kong in November 2020, in what would have been the world’s biggest initial public offering (IPO). However, the Beijing government intervened at the eleventh hour to halt the proposed $37bn listing.

“The cancellation of the Ant IPO had an impact on market sentiment,” says Mr Ng. “It was expected that China would use Hong Kong as its offshore centre for secondary listings. However, [the Beijing government] has a preference for its own stock markets. On top of this, the growth story has changed. The post-Covid 19 recovery has been delayed because the borders have not opened up — Hong Kong remains very dependent on mainland Chinese visitors.”

Anti-sanctions law

Underpinning the negative market sentiment are concerns that Beijing’s regulatory intervention in Hong Kong is going to be a lot more aggressive than previously expected.

In response to moves by Washington to ban US investment in various Chinese companies, Beijing responded by applying the country’s anti-sanctions law to Hong Kong. Such a move would give the Chinese government the power to punish companies and individuals that comply with sanctions imposed by foreign governments, notably the US.

“It means that financial institutions in the territory that comply with US penalties could face punishments from Chinese authorities. Financial firms in Hong Kong could be squeezed between two regulators. The proposed move has undermined market confidence in Hong Kong’s future. Everyone is dreading the anti-sanctions law’s implementation,” Mr Ng says.

Market concerns about the impact the law could have on Hong Kong’s position as a global financial hub may have unnerved the Chinese leadership. Beijing was expected to formally approve the law in August, but instead postponed a vote on the issue.

In a speech on October 5, Hong Kong leader Carrie Lam said Beijing had “no timetable” to extend the anti-sanctions law to Hong Kong, fuelling speculation over whether it may delay its implementation indefinitely or allow a revised version of the legislation.

The threat of regulatory overreach from Beijing has eroded international confidence in Hong Kong’s position as a global centre, Mr Ng adds, citing data that shows that while the number of Chinese companies across all sectors establishing a presence in the territory has risen sharply in recent years, the number of US and European companies setting up regional headquarters or offices in Hong Kong has dipped in the past two years as tensions between China and the West have increased. “It has had an impact on foreign firms which will, in turn, impact Hong Kong as a financial centre,” Mr Ng says. 

 In-depth insight into global regulation can be found in The Banker’s sister publication Global Risk Regulator.


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