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Jake Van Der Kamp

The reaction of China's stock markets to Deng Xiaoping's death is among the greatest tributes one can pay the man.

They did nothing.

This tells the world that by retiring while still in good health, he achieved his purpose of a smooth transition of power in Beijing.

Four years ago, they would have suffered a sharp correction. But then, four years ago they had only just come into existence and this too is a tribute to the man.

 They were his creation in the end but he no longer had to direct things personally to bring them into being.

His work had been done.

He must have taken pleasure from that in his final years.

The reaction of the Hong Kong market is a further tribute. The rally of 305.01 points on the Hang Seng Index was not what foreign investors had expected.

What it tells them, and what they are gradually beginning to accept, is that political risk does not cloud the performance of the Hong Kong economy any more than it does so in other Asian economies.

This perception of risk had long been one reason the Hong Kong market traded at price-earnings multiples much lower than the average of other Asian markets or of the US market.

The odd thing about it is that, for several years the stock market has been the only Hong Kong dollar financial asset to be out of step in this way.

Hong Kong interest rates rarely vary more than 50 basis points from their US equivalents and yields in the property market have come down to US levels.

The stock market has long traded at a substantial discount to US equities.

It has done so because foreign investors have a much larger presence in the stock market than they do in the domestic money or property markets.

The local investor has long accepted that while the transition to Chinese sovereignty on July 1 may have some uncomfortable results, there is no reason why it should affect business conditions in Hong Kong.

 If this is so, then he is happy to pay the US dollar price for the US dollar financial environment which Hong Kong has adopted through its peg to the US dollar.

 The foreign investor, although slowly changing his mind, is still a little uncomfortable with it and still would like his discount for Hong Kong equities.

Of course, the market's reaction to Deng's death is more related to the political environment in China than in Hong Kong, but it nonetheless has sent another wake-up call to the foreign investor.

Think again, sir. Things have changed.

 If this was Deng's last achievement, then he would undoubtedly have been pleased.

It is sad he could not fulfil his lifelong dream of visiting Hong Kong before he died, but he has left us the enduring legacy that we can go about our business without worrying unduly about political matters.



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