We desperately need to invigorate our stock markets. This is not artificially pushing up our stock markets, but because our stock markets have been artificially depressed for quite a while.
With Hong Kong being a global financial center, a low stock market valuation is particularly damaging, not just for the financial sector, but for the wider economy. A low stock market valuation implies a significant negative wealth effect that depresses consumption and home purchases. It implies fewer initial public offerings. Turning to debt as a means of financing investment may not be a viable option because this would undermine the capital structure of the firm and increase vulnerability to market stress. Capital investment declines, hurting research and development. Innovation suffers.
Financial decoupling led by the United States is the main culprit. Industrial decoupling is very difficult today because most advanced products have supply chains that require participation from many partners around the world. China has a huge manufacturing prowess and a huge market. The US has to depend on China as a supply source for many products and on the China market to sell its products. But financial decoupling does not hurt the US at all. In a way, it is benefiting the US’ stock market because investors who cannot make money in the Hong Kong market or the Chinese mainland market will invest in the US market, fueling the advance of US stocks, boosting IPOs there, along with consumption and investment.
As an international financial center, Hong Kong does not impose any capital controls. Hong Kong investors have increasingly become so disappointed with investing in their home market that they are fleeing to the US market for better returns. At the same time, US investors are avoiding or prevented from investing in the Hong Kong and mainland markets. They do so in part because the US keeps expanding its “entity list” to include more Chinese companies that are subject to sanctions, and in part because its public pension funds and public bodies have been asked to avoid investing in the Hong Kong and mainland markets.
As a small open economy, Hong Kong is indeed under siege. Our predicament is mainly a result of external factors. Geopolitics and weak economies in many overseas markets are highly unfavorable.
Since Dec 23, 2020, the US Commerce Department’s Bureau of Industry and Security (BIS) has treated transactions involving Hong Kong under the same export control policy as any other People’s Republic of China destination. Last year, the BIS “identified and designated 39 entities located in Hong Kong that provided support for a foreign military acting contrary to US foreign policy and national security. As a result, a BIS license is required for certain exports, reexports, and in-country transfers when a party has knowledge that a military end user is a party to the transaction (e.g., as purchaser, intermediate consignee, ultimate consignee, or end user).” Earlier, Executive Order 13936, issued in July 2020 under the Trump administration, suspended the application of Section 201(a) of the Hong Kong Policy Act to certain US laws. Today, there are approximately 600 Chinese entities on the “entity list”. Since many mainland companies are listed in Hong Kong, and since the list continues to expand, investors are naturally averse to investing in the Hong Kong market to play it safe.
Still, many of Hong Kong’s listed companies are doing fine financially, and many are also paying handsome dividends. To invigorate our stock market, I would propose that as a first step, our Hong Kong Investment Corp, which was set up following the Policy Address by the chief executive in 2022, should aggressively purchase Hong Kong’s undervalued, high-yielding stocks. However, its total initial capital, at HK$62 billion ($7.95 billion) at inception, was barely over half the HK$120 billion that was spent to buy Hong Kong stocks back in 1998, when Hong Kong was besieged by speculators led by George Soros, who was betting and attempting to engineer Hong Kong dollar’s unpegging with the US dollar. The large-scale purchase of stocks by the Hong Kong Special Administrative Region government caught speculators by surprise. The move was a great success because the government ended the crisis, restored confidence, and in the end made a huge profit.
The SAR government should also persuade Hong Kong’s investors to move their portfolios away from the US market and back to the Hong Kong market. At the same time, Beijing should also persuade its allies to avoid the US market and buy the stocks of well-managed, high-yielding companies listed on Hong Kong and mainland bourses. This is not only a show of confidence in our economies but will rebalance the world’s stock markets more logically. The price-earnings ratio of the Dow Jones Industrial Average was 25.28 on Aug 16, compared with the Hang Seng Index’s 9.920 and the Shanghai Stock Exchange’s 12.32.
Of course, investors should invest where they like. But a show of confidence from our governments when it is most needed, as well as an appeal to investors based on revelation of the unreasonable valuation ratios, plus regulatory improvements, will go a long way to restore balance and market confidence.
The author is an adjunct research professor at the Pan Sutong Shanghai-Hong Kong Economic Policy Research Institute and Economics Department, Lingnan University.
The views do not necessarily reflect those of China Daily.
