Fasten Your Seatbelts: Unless Beijing shells out for another stimulus, more volatility is likely for the Hong Kong market.
Photo: cnwest

Translated by Andrew Vanburen from a Chinese-language piece in Sinafinance

MORE SHARP UPS and downs and share price fluctuation can be expected for Hong Kong shares.

However, if Beijing were to suddenly announce another stimulus... then all bets are off.

First, let’s take a look at where we stand now.

The big picture reveals that Hong Kong shares are down nearly a fifth – or 18.88% -- from year-earlier levels.

Narrowing things down a bit, since the beginning of the year the benchmark Hang Seng Composite Index has risen 8.8% thanks to a strong July and early August.

That’s not saying much as in the first half of 2012, Hong Kong’s capital market was one of the worst performing major markets worldwide.

This phenomenon is not just paid proper attention in regional dailies.

After all, it must be remembered that the Hong Kong bourse is Asia’s No.3 stock exchange measured by total capitalization and the fifth biggest worldwide.

August, while kicking off in promising fashion, has since tapered off, with the benchmark index up a mere 1.3% at last check since the beginning of the month.

Taking a closer look at recent market behavior, we saw the Hang Seng Index jump on early Tuesday trade only to quickly sell off its newfound wealth and finish the day down 0.30%, only to lose another 1.2% on Wednesday.

What happened?

Much of the downside pressure can be attributed to poor intraday performance of shares in neighboring markets in Mainland China as well as the fact that so much of the Hong Kong bourse itself is occupied by PRC-based listcos.

Sinafinance blogger Liang Yuan

Add to that the reality that most Hong Kong-based listed financial institutions have significant portions of their business activity – in many cases, the lion’s share – taking place in the PRC, with newly opened bank accounts, savings levels and first-time insurance policies occurring at a much faster clip in Mainland China than in Hong Kong.

Therefore, the dual dream of many Hongkongers of delinking -- reducing overreliance on exports and reducing overdependence on the fate of the PRC economy in determining the make-or-break fate of the Hang Seng Index --becomes an increasingly distant dream day by day as sales to the PRC increase.

So it is now nearly impossible for even the most novice of Hong Kong market investors to live in a vacuum and pay no attention whatsoever to economic data and macro policy moves from Beijing.

But as if that wasn’t hectic enough a demand on the already time-strapped investor in the Special Administrative Region’s stock market, said shareholder must also keep another eye on the rest of the world – notable Europe and North America – as these two regions have been known to send jolts and daggers through the Hong Kong bourse when regional data surprises in either direction.

We have seen as much recently when EU economic statistics surprised on the upside one day.

Being the No.3 stock market in the region is an honor that Hongkongers should be proud of and take to heart.

But it still means there are two markets bigger than Hong Kong in the neighborhood.

The status of PRC-listed shares in particular – in addition to close linkage to the fate of the Chinese economy – makes the Hong Kong stock market seem less like a bronze medal winner and more like a highly vulnerable major market in a very volatile global marketplace.

That being said, the upside to heavy reliance on its giant neighbor to the north is that should Beijing put in place another stimulus package in the near term –as most analysts expect – then Hong Kong can sit back and most likely enjoy a sustained uphill climb.

But until China’s economic planners make the move, please keep your seatbelts fastened.

See also:

Rocky Going For Hong Kong’s Cornerstone Investors

BUCK STOPS HERE: 15% Of China H1 IPOs Denied

HEAT STROKE: China’s Erratic Summer IPOs

OLD MAN, NEW MONEY: Meet China’s Nearly Century-Old Investor

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