China’s slowing economy, weakening consumer demand and a brewing property crisis, has put the brakes on investor sentiment in recent years.
Given Hong Kong’s close business links to China, and just how many Chinese companies are listed on the Hong Kong Exchange, Hong Kong stocks have suffered. Since its peak in early 2021, Hong Kong’s benchmark Hang Seng Index (HSI) has lost nearly a quarter of its value.
More recently, though, there has been a resurgence of investor interest in Hong Kong stocks. That has resulted in the city’s benchmark Hang Seng Index (as of 25 October) advancing over 20% in the past 1.5 months.
We look at some reasons for this impressive gain in Hong Kong’s key benchmark level?
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#1 Massive Stimulus Measures In China
In late September, a slew of support measures were announced by China’s authorities that turbocharged investor sentiment in both China and Hong Kong.
Following the first interest rate cut by the US Federal Reserve in over four years in September, China’s central banks, the People’s Bank of China (PBoC), announced its own monetary easing measures. On 24 September, the PBoC announced that it would set up a RMB 800 billion (US$113 billion) swap facility that would allow securities brokers, funds and insurance companies to tap liquidity from the central bank to purchase equities.
Seen as a strong move to support share prices in China and Hong Kong, this lifted sentiment and the Hang Seng Index finished that same day up 4.1%. As a reminder, Chinese investors can also buy shares of Hong Kong-listed Chinese companies via the Stock Connect Programme that links both the Mainland Chinese stock markets and the Hong Kong stock market.
With popular stocks like Tencent Holdings (HKEX: 700), Alibaba Group (HKEX: 9988), and Meituan Dianping (HKEX: 3690), that are only available on the Hong Kong stock market, Chinese (as well as international) investors drove up the share prices of these stocks.
For example, over the past month the share price of Tencent is up 10.2%, Alibaba is up 16.6%, and Meituan Dianping is up 38%.
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#2 Interest Rates And RRR Cuts Spur Gains
Only a day later, on Wednesday 25 September, the PBoC cut its medium-term lending facility to 2% from 2.3%, representing it biggest cut since 2016. The facility is used by the central bank to help guide its market interest rates.
Then on Friday 27 September, the PBoC went further and cut the seven-day reverse repurchase rate by 20 basis points (bps) from 1.7% to 1.5%. It then went on to reduce the rates on a variety of other standing lending facilities by 20bps each.
On the same day it also announced a cut in the reserve requirement ratio (RRR) for banks. This move – which saw a 0.5% reduction in the amount of capital banks have to hold in reserve – was aimed at freeing up liquidity in the broader lending market in China.
Given the sizeable RRR cut, it’s estimated that around RMB 1 trillion (US$143 billion) in long-term funds will be freed up for banks to lend more and also by government bonds. This spate of announcements during the week gave investors a reason to buy both China and Hong Kong stocks that had been trading at deep value discounts.
As a result, from 24 September (when the PBoC announcements first started) to 7 October the Hang Seng Index gained over 26%. International investors continued to buy shares in Hong Kong-listed companies during “Golden Week” – at the beginning of October – when Mainland Chinese stock markets were shut for over a week.
Because Hong Kong’s stock market remained open throughout – bar one public holiday on 1 October – there was a rush by international investors to get in on the ongoing stock market rally and this resulted in a certain level of “FOMO”.
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#3 Hang Seng Index Level – 19 September to 18 October 2024
Source: Google Finance
The Reality Of Future Growth In Hong Kong Stocks
While there was a lot of excitement surrounding the Hong Kong market, the reopening of Mainland China’s stock markets on Tuesday 8 October saw a lot of investors take profit in Hong Kong and rotate into the China markets – that were playing catch up to Hong Kong’s gains.
Intense selling took hold in Hong Kong and the Hang Seng Index finished that day down 9.4%. Since then the market has traded sideways and remains around 10% below its 52-week closing high of just over 23,000 points.
Despite that, the Hang Seng Index is still up by 15.5% in the past month. Many market analysts have commented that new measures or further stimulus from the government will have to be announced to keep the rally going.
Both Hong Kong and China markets also received a welcomed boost from comments by President Xi, who said that science and technology should be at the forefront of Chinese modernisation. This resulted in Hong Kong-listed tech companies seeing strong gains.
Prior to surpassing 20,000 points in its recent rally, the Hang Seng Index in Hong Kong hadn’t traded above that key range since June 2023. For investors, many will be hoping there are further gains to be had as well as more stimulus measures from the Chinese government forthcoming.
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