Hong Kong Faces a Year of Hardship, If History Has Its Say

 | Jul 03, 2017 | 12:00 PM EDT
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Hong Kong on July 1 mourned the 20th anniversary of its handover from Britain back to the mainland. It's a two-decade milestone that citizens would rather forget -- it just means there are only 30 years left Hong Kong becomes a plain old nothing of a Chinese city, without its special rules and freedoms.

So the significance of 2017 is as much on people's minds as anything. The global financial crisis started in late 2007. The Asian financial crisis kicked off right here on Hong Kong's stock market in 1997, after the Thai baht devalued. And so too did "Black Monday" get going, on the Hong Kong exchange in 1987. 

Will the pattern repeat in the late stages of this year?

Many Cantonese people are highly superstitious. Although sometimes people attribute the "luckiness" of the number 8 and the "unluckiness" of the number 4 to feng shui, it has nothing to do with it. The time-honed system of "wind water" has some pretty sensible things to say about, for instance, the layout of a home. But the word for eight, bat, is good solely because it rhymes with fat, "get wealthy." The word for four, seh, is unlucky just because it sounds like seh, "die."

That's it. It would be like saying that 1 is your lucky stock-market number because it sounds like "won." But for that simple reason alone, we have 65-floor structures that are actually 58 storeys tall, or less, because they're missing all the floors that end in 4 - sometimes with 13 thrown in. The license plate "28" sold for HK$18.1 million ($2.3 million), and "18" fetched HK$16.1 million ($2.1 million).

Years ending in "lucky 7" have been anything but in Hong Kong.

In 1987, "Black Monday" on October 19 actually began in Hong Kong before spreading to Europe and eventually the United States. In Hong Kong, the bombing of two American-owned ships by Iran at the end of the prior week fed into concern over recent U.S. stock losses, and prompted an 11% plunge in the benchmark Hang Seng index. The Hong Kong stock exchange suspended trading for the rest of the week "to protect the investor."

That didn't work so well. Traders were facing margin calls against their cash equity positions. But with the Hong Kong Futures Exchange also shuttered, they couldn't sell out of profitable positions. Unable to trade, brokers began to go bust, and -- left holding the bag -- the clearing house of the futures exchange itself went bankrupt, too.

When trading resumed a week later, the Hang Seng made up for lost ground with a 33% descent. The incident is best remembered for the chairman of the Hong Kong Stock Exchange, Ronald Li, threatening a Sydney Morning Herald reporter with jail after daring to ask Li questions at a press conference. Li himself was within months arrested on corruption charges and jailedf, as Tom Holland explains in the South China Morning Post.

Hong Kong had an even-worse crash in 1997. Thailand, one month after abandoning a currency peg with the U.S. dollar, was compelled to devalued the baht, sparking a series of competitive moves in other currencies. Vast amounts of dollar-denominated debt weighed down companies in Southeast Asia, forcing a rash of nationalizations. Hong Kong also had, and still has, a dollar pegged to its U.S. counterpart, meaning it could make no such move.

The Hong Kong Monetary Authority, our central-bank equivalent, was forced to spend billions supporting the Hong Kong dollar against massive amounts of speculation from the likes of George Soros at the Quantum Fund. Overseas traders also shorted Hong Kong stocks heavily.

Other hedge-fund managers such as Julian Robertson at the Tiger Fund had also been betting heavily against currencies like the baht. Even Nobel Prize-winning economist Milton Friedman predicted the demise of the Hong Kong dollar.

They were wrong. Stocks fell 60% but revived by late 1998. The deep-pocketed Hong Kong government, now backed by Beijing, stood firm. The city nationalized a large part of its stock market, spending HK$120 billion ($15 billion) on blue-chip stocks, and succeeded in reviving public confidence in the markets. 

The Exchange Fund that the government used to buy the shares then created one of the world's first exchange-traded funds when it floated the Tracker Fund HK:2800 in 1999 to dispose of the assets it had acquired. It's still a solid way to play Hong Kong stocks.

Property prices fared even worse, falling 69% and never recovering until after the SARS shock of 2003. When I bought my first apartment here in 2004, the dentist who owned it had only just made back his money from a place bought at the peak in early 1997.

2007 still remains painful for stock traders. The Hang Seng plunged 65% again, in response to global market turmoil, and actually has yet to climb back to those levels. It's 15.4% off those 2007 highs, despite a 19.5% run this year.

Homeowners have, on the other hand, had it easy. Property prices here dipped for around a quarter, then recovered with a vengeance, and have been on a bull run since then.

I actually put that same apartment on the market in late 2008, right as Lehman went bust. We had no takers for a while, then the investment bankers started popping in looking for any distressed deals. Most households in Asia require people to take off their shoes at the front door, and I could tell these were i-bankers by their hand-crafted Italian leather kicks.

I was in no distress at all, although I wanted a bigger place since our family had welcomed a second child. I held out for a price similar to that of a neighboring unit that sold before the crisis, and got it in mid-2009.

Now, I'm getting more and more questions about when Hong Kong's property bubble is going to burst. Hong Kong property prices are at their highest level in history, 180% up from that post-Lehman low point.

My friends who don't own property keep hoping for a 1997-style bust so they can buy property on the cheap. I've had friends who stayed out of the market waiting for that event -- they've watched prices triple on them while they bided their time.

The investment banks chip in from time to time. Deutsche Bank now expects Hong Kong property prices to fall 48% by 2026, with an ageing population and increased supply.

This is, however, similar to the prediction in September 2015 from that Hong Kong property prices could fall 30% by the end of 2017. They're up 9% since then.

And the prediction from Jones Lang LaSalle in April 2014 that they could fall 30% if the government's anti-speculation measures weren't immediately removed. They've risen 34.7% since then.

And the prediction from ANZ in 2013 that Hong Kong is in a "bubble" and facing a "perfect storm," with prices 24% above fair value. They have risen 34.3% since then. 

They won't crash now. There may be a price dip, but holding power is very strong in wealthy Hong Kong. The Hong Kong Monetary Authority has warded off speculation with measures like a 15% tax for non-residents and another 15% tax on quick sales. It has made mortgage restrictions extremely tight. There's virtually no overborrowing, and if prices do dip, sellers will simply take their properties off the market and keep charging high rents.

Will the stock market crash? In one way, it has. The secondary GEM market is at an all-time low thanks to dodgy-dealing scandals. Since governance standards are already lacking on the main board, I wouldn't touch the GEM market unless you've already got an illegal inside edge -- which plenty of traders appear to have.

But for the "regular" market, Hong Kong stocks will take their lead first from economic, social and political events in China. Global market movements will also have their sway. With gradual, albeit very slow, growth in the United States and Europe finally finding its feet, I don't see any external pressures forcing the Hang Seng to its knees. 

One thing's for sure; after 1987, 1997, 2007 and, maybe, 2017, there's another scary milestone out there. I mentioned that Hong Kong has 50 years as a special entity within China, with its own rules.

We're almost half-way through that, well onto the year of full Sinicization. Half the city decamped prior to 1997, heading for Toronto, Vancouver, Sydney. So expect another rush for the exists as we approach that deadline. The year of full integration into China? Of course, it ends in Hong Kong's unlucky digit.

It's 2047.

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