Hong Kong is the worst performing major stock market not only in Asia but the entire world so far this year. The hamstrung Hang Seng index is hobbling into year end. It's astonishing to see a major financial hub's market down almost 15% in what's supposed to be a year of recovery, when U.S. markets and others have been touching record highs.
The Hong Kong stock market's increasing influence from Chinese tech explains part of the underperformance. Then there's real estate, a mainstay of the local market but beaten down by the sharp falls in mainland Chinese developers. And equally, the depressing disappearance of the city's civic freedoms are to blame.
The Hang Seng index is down 14.8% year to date. It is far out of step with the double-digit gains in Japan's Topix index (up 10.6%), Indonesia (up 10.8%), Australia (up 11.2%), Thailand (up 12.0%) and the majorly outperforming markets in Taiwan (up 18.5%) and India (up 23.9%).
There are smaller gains, true, in Singapore (up 9.5%), South Korea (up 4.0%), with the Philippines essentially flat (currently 0.1% lower for 2021), and losses in New Zealand (down 3.7%) and Malaysia (down 8.9%).
Stranger still is that mainland Chinese markets are standing in the black - depending on how you look at them. The Shanghai Composite Index is up 4.1% so far in 2021, and the Shenzhen Composite Index, with a greater tech weighting, is up 9.2%. Mainland-listed, mainland-focused stocks are doing fine.
It is internationally focused Chinese companies that are experiencing the rot. The Hang Seng China Enterprises Index is made up exclusively of Chinese companies that are listed in Hong Kong but that do not trade inside mainland China. It is down a startling 22.2%, a sharp contrast with home-listed Chinese companies.
It's a reflection of the rising pressure from Beijing for Chinese companies to "return back home" in terms of their listing. Didi Global (DIDI) is the unwitting poster child for that category of company. The ride-hailing market leader in China was pressured into delisting from the New York Stock Exchange under duress from Beijing. It was barred from signing new customers after its June 30 IPO, leaving its shares now 55.3% below the listing price. It said at the start of this month that it will abandon the NYSE and attempt to list in Hong Kong, as I explained at the time.
Most of the tech companies listed in Hong Kong have U.S. listings that are sure to be equally unpopular with the Chinese Communist Party. Until they abandon them, there's the suspicion their shares can be hurt by drastic action. U.S. authorities are also acting to bar foreign companies if they don't file accounts that can be inspected by U.S. regulators - a move that Chinese law suggests would be illegal. It'll take a regulatory huddle across the Pacific to sort that one out.
Meanwhile, Hong Kong's market remains in limbo. It should rebound once any penalties that Beijing is levying on Big Tech are laid down, and if the U.S. listing issue can be resolved. If and when that happens, there could be a swing in the order of 20% to 30% - the Hong Kong market's underperformance this year - but this is a regulatory issue, not one driven by fundamentals. A policy change could be announced overnight in Beijing, or Washington. Or not.
Then there are the ongoing social problems in Hong Kong. Britain says 88,000 Hong Kongers have taken up its offer of a residence visa through September, after the program began in January. A record number of Hong Kongers have emigrated, to the United States, Australia, Canada, Singapore and New Zealand and other popular destinations.
British Foreign Secretary Liz Truss just delivered the six-month report that Britain compiles twice a year to cover the state of play in Hong Kong. It is damning in its condemnation of the oppression of citizens by the Hong Kong puppet government and the Chinese Communist Party above it.
In particular, a much-hated National Security Law went into effect on June 30, 2020, imposed directly from Beijing rather than having any input from Hong Kong's people or their representatives. But the local authorities - the police, the courts, the administration of Chief Executive Carrie Lam, and the shadowy National Security Office - have abused it to persecute any and all of Beijing's perceived enemies.
The media is under attack, sometimes literally. Unions, civic groups and student unions have been forced to disband. There's an informant's hotline, East Germany-style, for you to rat on your neighbors if you think they're not patriotic enough. You can feed through information, photos, audio clips and video files if you want to report a violation of the National Security Law, which is so vague that popular protest slogans can land you in jail.
Britain notes that any contact by its politicians with anyone in Hong Kong is often construed by Beijing and the Hong Kong government as "foreign collusion." This can involve the simplest diplomatic contact, and in fact Beijing's critics are dubbed to be "colluding" with, well, anyone that they contact overseas. The Hong Kong government and China frequently refer to shady "foreign forces," which sounds like an army, or the CIA, but can equally mean the World Association of Girl Guides and Girl Scouts. They never identify who these "foreign forces" are.
Hong Kong is preparing to hold joke elections on December 19. They're a sham designed to pretend there's any semblance of democracy in the city. But no pro-democracy candidates are running - they're not allowed to, since only pre-screened "patriots" who support the mainland government and the Chinese Communist Party can take part.
The vast majority of opposition politicians have either gone into exile, or are in jail. The city's most-popular newspaper, the pro-democracy tabloid Apple Daily, was forced to shut down when its accounts were frozen and its top executives arrested. On Monday, the newspaper's founder, Jimmy Lai, was sentenced to 13 months in prison for attending a vigil honoring those who died in the 1989 Tiananmen Square massacre. Hong Kong used to mark the June 4 anniversary with a memorial service attended by thousands of people. It has been banned the last two years, under the pretense that it would violate Covid-19 protocols.
Lai, who was sentenced alongside seven other pro-democracy leaders, is already in prison. He was convicted of inciting people to participate in a rally for a cause that is, at least on paper, legal to celebrate. But the police didn't approve the vigil - for political reasons they pretend are all about public health. A hand-picked judge doing Beijing's bidding, Amanda Woodcock, insists there's a need for "deterrent" sentences due to the disruption to public order and the way those attending "belittled" a public-health threat. She insists those convicted thought the Tiananmen Square massacre commemoration was "more important than protecting the community."
They thought nothing of the sort. Lai wrote a mitigation letter that you can find here. Any punishment will see him share the "burden and the glory" of those who shed their blood to proclaim truth, justice and goodness. "May the power of love of the meek prevail over the power of destruction of the strong," he says.
These social issues bubble away, a poisonous undercurrent beneath society. It is the issues over U.S. listings that have depressed the city's stock market this year, not to mention the forced deleveraging of the Chinese property industry. Hong Kongers will remain depressed as long as they're oppressed by the dictatorship sitting atop them.
