Two Asian assets keep setting and promptly resetting multiyear lows: the Japanese yen and Hong Kong equities. At a punishing time for the markets, these holdings have performed particularly poorly, with room yet to weaken. They're already at weak points set during previous financial crises.
In Hong Kong, the Hang Seng Index closed down 0.2% on Friday, though it was down as much as 0.9% mid-afternoon before a slight recovery at the close. Still, Friday's trading takes the Hong Kong benchmark's one-year losses to an eye-popping 37.5%, significantly worse than mainland Chinese stocks, with the CSI 300 index down 24.1% in the same time span.
Today saw the Hang Seng sink to its lowest level in more than an unlucky 13 years. It is pushing down toward the 16,000 level, setting a low of 16,137 on Friday, and stands at levels last seen in April 2009. That was in the aftermath of the Lehman Brothers bankruptcy, which caused a year of weakness in Hong Kong, though the Hang Seng was back above 20,000 by August 2009.
Japan's yen weakened past ¥150 to the U.S. dollar on Thursday and remains there in Asian trading on Friday. Its current rate of ¥150.43 takes it to rates last seen in July 1990. I explained more about the yen's move last week, when it first tested that 1990 level, back when New Kids on the Block were actually new.
There's no arguing that the ¥150 barrier is momentous, a mental barrier, resetting the 1990 low. If the Japanese currency weakens to ¥159, we will have to look further back to 1986 and Japan's bubble years. Between March 1985 and August 1986, a period of 15 months, the yen strengthened remarkably, from ¥261 to the US$ to ¥153. The Plaza Accord gathering of finance ministers in New York in 1985 led to a rapidly depreciating U.S. dollar against most major currencies.
Yen strength then fed into Japan's asset bubble, an economic expansion that began in 1986 and finally burst in 1992. You might be able to guess what popped it. Yes, repeated interest rate increases by the Bank of Japan, Japan's central bank.
An accommodative central bank explains why Japanese equities now have been star defensive plays in this year's selloff. The broad Topix index, down 0.7% on Friday, is showing only a 5.9% decline over the last 12 months. The weak yen aids its exporters, but it is Japan's sustained and supportive monetary policy and mild inflation that also are contributing to the outperformance relative to other indexes.
The S&P 500 is down 19.4% in the last 12 months and 23.6% in 2022, with few market participants bold enough to call a bottom right now.
There's no sign of a turnaround in Hong Kong, certainly not as rapid as the 2008-2009 selloff and rebound. The city's leader, Chief Executive John Lee Ka-chiu, has just given his first policy address, a State of the Union type speech.
The policy address is often peppered with giveaways and stimulus. The headline this time is a two-year visa and a real estate stamp-duty rebate designed to attract high-earning foreign "talents" to what calls itself "Asia's world city." Critics have noted that there was little to nothing in the policy address designed to stem the brain drain of local talents, with emigration at record levels.
Heading for the exits
Through August, Britain says 130,000 Hong Kongers have been approved for a special residence visa that puts them on a path to British citizenship. Britain this week expanded the offer to include people born after Hong Kong's handover back to China in 1987 if they have a qualifying parent. It's no coincidence that Hong Kong's overall population is shrinking, down 1.6% to 7.3 million as of mid-year.
Lee, a former police commander and national security chief, is also defending his presence at a financial conference that the Hong Kong Monetary Authority is due to hold in November. The Global Financial Leaders' Investment Summit is designed to be a showcase to stress that Hong Kong is back, baby, and better than ever. The city has scrapped mandatory hotel quarantine, though its Covid rules are still stringent by Western standards. There's still mandatory mask wearing almost everywhere and a health code tracking app is enforced on your phone if you want to enter public venues, including restaurants.
There's one problem with the financial conference: The United States government has sanctioned John Lee for his part in crushing civic freedoms and political opposition in Hong Kong. Just like his predecessor as chief executive, Carrie Lam, any entity that wants to use the U.S. financial system should not do business with Lee. He is also barred from travel to the United States.
Why, then, are top executives from major U.S. finance houses lining up to stand on stage at the November conference, where Lee will give the keynote address? Top brass from Blackstone (BX) , Citigroup (C) , Goldman Sachs (GS) , JPMorgan Chase (JPM) and Morgan Stanley (MS) are all scheduled to take part.
The conference is designed to benefit Lee, giving him exposure and prominence and star billing. Hong Kong basically changed the quarantine policy so the conference could happen, replete with financial fat cats. The catch is that the banks won't actually be paying Lee or, technically, providing him with a service that amounts to a fee.
Bad look
The big banks are keeping schtum on their participation. But a lobbyist representing the industry says they're fine in taking part. They're doing it for you, dear shareholder and customer, you see.
"Governments are responsible for setting foreign policy, not financial institutions," Liz McGee, a spokesperson for the Institute of International Finance, told Politico's China Watcher column. "U.S. financial institutions have a responsibility to their customers and shareholders to engage with one of the largest financial markets in the world."
I can't legally suggest that outside powers impose sanctions on Hong Kong. That's illegal in Hong Kong under the new and much-hated National Security Law and assorted other rules curbing political gatherings and free speech that Lee has helped bring in. But I would note that it most definitely would not be a good look for Goldman, Morgan Stanley, Blackstone and the like to suddenly appear on stage at a conference with Russian President Vladimir Putin right now after he was sanctioned by the United States for invading Ukraine.
Lee, perhaps correctly, is pretty confident he can proceed with impunity. He says the "so-called sanctions" are "barbaric," and he told reporters earlier this month, "So we will just laugh off the so-called sanctions."
They really are sanctions, John. But so far, it looks like he's right to laugh.
Japan is also looking to improve its standing, with officials warning they're watching the yen, but not confirming if they will intervene. Exports, getting cheaper with the yen down 46% since the start of 2021, and imports of fuel that get more expensive with every fen of yen weakness are the key considerations.
Japanese Prime Minister Fumio Kishida is today winging his way to Perth, where he will meet his Australian counterpart Anthony Albanese on Saturday. Kishida says the two countries hope to update a security pact they signed in 2007, no doubt with China's military expansion and antagonism on issues such as Taiwan on the minds of the leaders.
Japan and Australia form two corners of "the Quad," the Asia Pacific grouping of democracies that also includes India and the United States. Those four nations continue to stress the importance of a "free and open" Indo-Pacific. The updated pact will likely include an increase in joint training exercises between Japan and Australia, as well as greater sharing of intelligence assessments not only on China but also other challenges such as a nuclearized North Korea.
Kishida's top aide, Chief Cabinet Secretary Hirokazu Matsuno, described Australia as a "special strategic partner," with shared basic values and strategic interests. Energy supply, with Australia shipping key commodities such as liquefied natural gas and coal to Japan, and climate change are also on the agenda.
