South China Morning Post
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The Hang Seng Index flag (left) flies outside the Hong Kong Exchanges and Clearing building in Hong Kong on August 16, along with other flags including the national flag and Hong Kong SAR flag. Photo: EPA-EFE
Opinion
The View
by Richard Harris
The View
by Richard Harris

With the Hang Seng taking its cue from Shanghai instead of New York, investors must watch Chinese policies closely

  • The recent hit on Hong Kong stocks from Beijing’s wide-ranging regulatory crackdown is a reminder of how closely tied the city’s benchmark index is to the fate of heavyweight mainland stocks
Richard Harris
Richard Harris
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The recently retired chief executive of the Hong Kong stock exchange, Charles Li Xiaojia, must feel that his timing was perfect. No one could have foreseen that the Four Horsemen of the Apocalypse would have descended quite so quickly on the stock market, especially after all the hard work on the stock, bond, fund and wealth connects to make trading much easier between Hong Kong and mainland exchanges.
This has been a good year for many investors, unless like me you have a Hong Kong-based pension strategy. Our stock market hit bear territory last week, down more than 20 per cent from its peak on February 17.

The Hang Seng Index has not shared the love, despite the S&P 500 being up 21 per cent this year, Europe’s STOXX 50 index up 18 per cent, and Shanghai and Tokyo above water in local currency terms.

Hong Kong is down only 7 per cent in the year to date, thanks to a big rally in the first six weeks, but that nevertheless marks the worst major market performance in the world. The despondent mood lightened a little earlier this week with a “dead cat bounce” of around 3 per cent.

There are plenty of narratives to explain the cause of our underperformance. Public outrage over Nicole Kidman’s quarantine exemption, locked-down borders, government flip-flops, but the big finger points towards Beijing’s regulatory crackdown across several critical industries that now form the largest share of our stock index.
There is no doubt that some of China’s fastest-growing companies in recent years have had a fairly easy time on the regulatory front but the speed and aggression by which the Chinese authorities have addressed the reforms exceed even the evangelical verve reserved for US antitrust regulators. Beijing’s clean-up campaign has disrupted businesses in education, e-commerce, ride-sharing and gaming, to name a few.
Major share placings by Ant and Didi have been stopped in their tracks. Big names such as Tencent and Alibaba, the owner of South China Morning Post, have been seriously affected.

Chinese tech billionaires are crying all the way to the bank, having lost around US$90 billion of personal wealth since the start of July, according to the Financial Times. On the other hand, the billionaires who dominate the automobile and renewable energy sectors saw their wealth rise by US$35 billion over the same period.

Privacy rules are becoming much tougher on the use of customer data. It is a surprise to see the authorities neuter several of the nation’s economic champions in quite such a drastic way. The selective industrial policymaking must remind investors that local stocks will be policy-driven from now on.

Historically, Asian stock markets have taken their lead from the major markets, despite us waking up for a new trading day earlier than most. Over the past three decades, the business news on RTHK in the morning would lead with what happened in the US the night before so that our markets could follow.

Most global stock traders in Asia would hang around, flicking elastic bands at each other, and wait until Europe had woken up before they would seriously commit to trading. That was then. The Hong Kong market is no longer looking for leadership from the world – but from the mainland.

Let investors trade Hang Seng Index stocks in renminbi: Hong Kong ex-monetary chief

We can track how closely correlated the Hong Kong market has been to the US S&P 500 Index and the Shanghai Composite Index over the years. From 1998 to 2009, Hong Kong was closely correlated to the US, averaging a correlation of 0.4. For a stock market, this is pretty high, as 1.0 is perfectly correlated.

The global financial crisis upset things for a year or so but, by 2013, the Shanghai Composite Index had asserted its gravitational pull. Since then, apart from 2018 (when all global markets had a coordinated rally) the bias has been for Hong Kong to take its lead from Shanghai.

It doesn’t seem likely, with China and the US on opposite ends of the economic policy spectrum, that Hong Kong will ever be correlated with the US again, except during big bull and bear phases when all markets are correlated.

We have known for a while that the Hang Seng Index is becoming dominated by the value of the heavyweight mainland stocks, which, as the index is expanding, will only continue.

What is new is that Hang Seng investors will have to keep a close eye on politics and policy as well – especially in light of Hong Kong having to follow the central authorities’ 14th five-year plan.

Investors will continue to listen to RTHK’s Money Talk at 8am, not to see what leads the S&P500 is giving to the Hang Seng Index, but for Chinese business news and political policy, and to keep an eye on their diversified investments – and to see if any crises are coming.

The market has been weak, but bear markets driven by policy tend to be sharp and short-lived, so investors should keep three market aphorisms in mind: the quote from Bill Clinton’s presidential campaign in 1992, “It’s the economy, stupid”; Warren Buffett’s exhortation to be “greedy when others are fearful”; and a maxim from my older and wiser boss, Robert Thomas, who would say “the best way to make money in the investment business is for the market to go up!”

Richard Harris is chief executive of Port Shelter Investment and is a veteran investment manager, banker, writer and broadcaster, and financial expert witness

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