Hong Kong stocks plunge with losses for the fourth year in a row

This summer, when the stock market turmoil in Hong Kong showed no sign of stopping, Paul Chan, the city’s chief financial officer, took action and set up a task force to inject confidence into a market beset by global investors who were wary of China.

Hong Kong cut taxes on trade and Mr. Chan went on a roadshow to Europe and the United States, where he promised measures to “keep investors optimistic about the prospects.” However, investors have been anything but optimistic and the city’s Hang Seng Exchange is among the world’s worst-performing stock markets this year.

The Hang Seng Index ended Friday, the last trading day in 2023, 14 percent lower than where it started the year. Stocks in mainland China also posted losses this year, with the CSI 300, an index that tracks listed companies in Shanghai and Shenzhen, falling 11 percent.

Hundreds of billions of dollars flowed out this year as money managers and pension funds trimmed their holdings in Hong Kong, long a gateway for foreign investors looking to pour money into mainland China. The outflows were largely driven by an economic downturn in China and increasing pressure on US investors to sell their positions in Chinese companies.

“Many of the companies in the Hang Seng Index are essentially companies that leverage economic growth in China,” said Chetan Seth, Asia equity strategist at Nomura, a Japanese bank. “China’s weak economy has clearly weighed on the performance of Chinese stocks listed in Hong Kong,” said Mr Seth.

The losses in Hong Kong and the mainland were in stark contrast to what happened in the United States, where inflation was easing and the labor market was strong. The S&P 500, which broadly tracks U.S. stocks, rose 25 percent in 2023, underscoring the divergent developments in the world’s two largest economies.

Global investors started the year optimistic that China’s economy would rebound after three years of strict pandemic rules and lockdowns. But when China fully opened its borders in January for the first time since 2020, many households were reluctant to spend money. Private businesses went bankrupt and the economy slowed.

China’s roiling real estate crisis has deepened the economic slump and spilled over into Hong Kong. After years of overexpansion and borrowing from foreign investors in Hong Kong, almost every private Chinese real estate developer has gone bankrupt.

Chinese real estate companies listed in Hong Kong were among the worst performing stocks. Property developer Country Garden, one of the biggest victims of the property crisis, has lost almost three-quarters of its value this year as the company moves closer to collapse.

Mr Chan, the finance minister, has blamed “misunderstandings caused by Western political biases” for the stock market’s poor performance as geopolitical tensions between Beijing and Washington reached a low point during the year. But 2023 marked the fourth straight year that the Hang Seng posted losses. At the same time, Hong Kong’s role as a financial nerve center for Asia has diminished as the country has been forced to align more closely with Beijing under a sweeping national security law.

Hong Kong’s loss of autonomy to China is worrying some global investors.

Hong Kong, a former British colony, was returned to China in 1997 with the promise that it would maintain a high degree of self-rule under a policy called “one country, two systems.” For twenty years, this allowed Hong Kong to define itself as unique and distinct from the rest of China, while at the same time providing financial access to the world’s second largest economy.

But after citywide protests in 2019, Beijing imposed the national security law, which has silenced political debate and suppressed civic activity.

More than 100,000 residents have done so left Hong Kong in recent years, partly due to the security law and strict pandemic restrictions. Many young Hong Kong professionals still there have expressed a desire to leave, making it a challenge to recruit the talent that helped the city function as a financial center.

Once a major hub for Wall Street banks, Hong Kong has experienced a drought of initial public offerings this year. Companies raised the lowest amount since 2001, resulting in layoffs at financial institutions across the city.

Many international companies have stopped hiring in Hong Kong. Now that less money is coming into the stock market and there are fewer transactions, dozens of brokers have also closed.

The downturn in China as well as geopolitics, elections in major economies including the United States, and central bank actions are likely to make 2024 another volatile year for Hong Kong.

Discuss some of these issues in an interview in a recent interview Speaking to the South China Morning Post, Mr Chan said: “2024 will be a year of great uncertainty.”