A historic slump in Hong Kong’s $4.6 trillion stock market is rippling through the city’s financial industry. Thirty local brokerages have closed down this year, after a record 49 shut up shop in 2022, according to Hong Kong stock exchange data. That comes as Wall Street banks lay off dealmakers due to a plunge in initial public offerings.
The Hang Seng Index is heading for a fourth year of declines, the longest losing streak in the gauge’s history, and fell to an one-year low this week. Average daily turnover is down 14% compared with the five-year average and the IPO market having its worst year since 2001.
The prolonged slump and the job losses are adding to questions about the future of the city’s position as Asia’s top international finance center in the wake of Hong Kong’s extreme pandemic curbs and Beijing’s imposition of national security legislation.
Despite analyst projections at the start of the year that Chinese shares would see a recovery after the country ended its Covid Zero restrictions, investor sentiment turned persistently downbeat. A struggling economy, weak consumption, strained US-China ties and a property crisis sent foreign funds fleeing.
The lack of liquidity shows “institutional interest in Hong Kong and China is declining to a new low,” said Qi Wang, UOB Kay Hian chief investment officer in wealth management. “Global investors have divested a big chunk of their Hong Kong holdings in the last two years. Many now consider China ‘irrelevant’ from a global portfolio view.”
A drought in deals is adding to the sense of a market in trouble. This year is poised to be the worst for Hong Kong debuts since 2001, just after the dotcom bubble burst, with $5.1 billion of IPOs. That’s a fraction of the $52 billion raised three years ago, and down 84% from the past 10-year average of $31 billion. Hong Kong Bankers Have Lots of Free Time, Anxiety as Deals Slump.
What is the aftermath of Hong Kong’s historic downfall?
Banks are downsizing as a result. In the past year, Wall Street banks including Goldman Sachs Group Inc. and Morgan Stanley have conducted multiple rounds of layoffs in Hong Kong. UBS Group AG cut about two dozen investment bankers in Asia, mainly China-focused roles based in Hong Kong and including several managing directors, Bloomberg News reported in October.
Hong Kong’s historic slump has seen several local brokerage shut down their shops. Small-and medium-sized brokerages, whose revenue mainly comes from trading commissions and margin businesses, are bearing the brunt of the market downturn.
According to a survey of local brokers by the Hong Kong Securities Association earlier this year, more than 72% suffered losses last year, with at least a quarter planning to scale down their operations this year.
“This wave of shutdowns and layoffs at brokerages is the worst I’ve ever seen,” said Edmond Hui, chief executive officer of Hong Kong-based brokerage Bright Smart Securities. “The key lies in improving the liquidity of the market. Now everyone is struggling. I simply don’t see any light at the end of the tunnel.”
Hong Kong stocks have the widest bid-ask spreads — the price difference between offers to buy and sell stocks — in Asia Pacific markets, said Tony Cheung, an execution consulting specialist at Instinet. That’s increased trading costs for institutional investors, he added.
The slump in Hong Kong has matched the timing with India’s historic growth. BJP’s victory in 3 states rallied up the stock market. The slow growth rate in the south asian country will foresee Indian Stock Market take over its place as the 7th biggest stock market in the world.
What is the reason of slow growth rate in Hong Kong? Does China holds the key to Hong Kong’s shrinking stock market?
Hong Kong’s efforts to revive its shrinking stock market are mere stopgap solutions, as analysts say a reversal in fortunes for Asia’s premier financial hub would not be possible without a major improvement in China’s economic prospects.
Hong Kong’s government has for months tried to boost turnover and revive a torpid stock market, the latest coming on Wednesday when its leader John Lee announced an immigration plan tied to investments and a cut in the stamp duty on stock trades.
But the region’s key financial centre and gateway to the world’s second largest economy is a shadow of its former self as foreign investors reduce exposure to a China they view as increasingly isolated by its opaque policies, struggling property sector and crackdowns on private enterprise.
With a market value of around $4.3 trillion, Hong Kong is home to one of the top-ranked stock markets globally just behind those in the United States, Japan, China and Europe.
But it compares poorly on turnover, with a daily average of $11.3 billion between January and June compared with $261 billion for Nasdaq, $27.9 billion for Japan and $77.9 billion for China’s Shenzhen exchange. New share offerings in Hong Kong have fizzled.
Dickie Wong, executive director of research at Kingston Securities, said the stamp-duty cut was in line with expectations.
It might spur a “short-lived rebound” in the Hong Kong stock market, he said, but longer-term issues such as the exodus of foreign investors and the tensions between China and the United States would remain an overhang.
The Hang Seng stock index (HSI) and the Hang Seng China Enterprises Index (HSCE) are down more than 11% each this year.
The HSI hit a 22,700.85 peak in late January and is currently around 17,000. Daily turnover has fallen below HK$80 billion on numerous occasions since the second quarter, halving from an average of HK$160 billion in 2021.
“Liquidity is clearly down due to foreign investors reducing exposure to China, since many investors, ourselves included, access China shares from Hong Kong,” said Rob Brewis, a portfolio manager at UK-based asset manager Aubrey Capital Management.
“I suspect it is due to the perception of worse prospects in the Chinese economy as well as enhanced political risk. The only solution to this is just a reversal of these trends, i.e. better economy and better foreign relations. There is no easy answer.”
Eddie Tam, CIO of Hong Kong-based Central Asset Investments, also reckons funds are not done cutting exposure to China, and foreign investors “are not nearly finished with the selling off of Hong Kong stocks.”
China’s economy has stumbled this year after a brief post-COVID bounce, with growth hurt by a protracted property crisis, elevated debt levels and sluggish demand.
Apart from China, it has to do with consistently poor performance of the economy. Hong Kong’s economy has been sluggish over the past few years which has invited the sudden downfall. Similar to China, Hong Kong has rising unemployment issues, property crisis and to top it all, ageing problems.
