HONG KONG (BLOOMBERG) - Investors in Hong Kong's stock market now need to factor in a substantially altered political and legal environment.
The city's businesses reopened on Thursday (July 2) after the July 1 holiday which saw the dramatic imposition of national security legislation. Hong Kong's financial markets seem to take it in their stride, with the Hang Seng Index adding as much as 1.7 per cent and the city's currency near the strongest it's allowed to trade.
Local developers lead gains on speculation the legislation will deter protesters, which could ensure stability on the city's streets and attract shoppers. Recent sales figures for Hong Kong development projects also suggested a tick-up in property prices, helping boost sentiment for the stocks Thursday. New World Development rose 4.2 per cent, while MTR Corp gained 3 per cent.
"Though there were protests yesterday, the number of people that took to the streets was much fewer, and severity of the clashes was far less than some of the violence we saw last year," said Raymond Cheng, property analyst at CGS-CIMB Securities. "That's reassuring for business."
Drawn from mainland China's system of governance, the laws complicate the city's reputation as a place with a robust rule of law. They will also likely ignite concern about capital flight, especially after Boris Johnson's government said it will allow millions of Hong Kong citizens to move to the UK.
The city's financial markets have been resilient to the crackdown, although no one had seen the contents of the legislation until Tuesday evening. While the Hang Seng Index sank the most in five years the day after the planned law became public knowledge, the benchmark took less than two weeks to recover from that shock. The gauge is at a higher level than where it was before China's move to crack down on dissent in the city was first reported, with cheap valuations and steady inflows from mainland-based investors supporting local financial markets.
The Hong Kong dollar is also showing few signs of stress - trading near the strong end of its trading band against the greenback. Its 12-month forward points have dropped since spiking to the highest level since 1999 in May, showing demand to speculate against the currency is also waning.
There are clear signs that Beijing intends to prop up Hong Kong's financial system through inflows and a flood of stock listings by mainland companies. Whether that support will be enough to maintain (or replace) the confidence of the global business community will need to be seen.
Investor confidence remains muted. The Hang Seng is in a bear market even as stocks in the US and a benchmark of Asian shares recovered. Hong Kong equities lost almost 7 per cent in May, the biggest drop relative to the MSCI All-Country World Index since the Asian financial crisis in 1998. That made the Hang Seng so cheap it still trades below book value, meaning traders are pricing firms' assets at less than their stated worth.
Hong Kong's economic outlook is clouded. The coronavirus pandemic has halted the daily influx of mostly mainland Chinese shoppers, hurting retail sales. The city's wider economy contracted 8.9 per cent in the first quarter from year-ago levels, suffering its worst quarter on record and extending the first recession in a decade.
With the new laws creating doubt over what could land people in trouble, global businesses will need to reassess Hong Kong's attractiveness as a financial center. Further retaliation by the US could also place the city even more firmly on the front line of a battle between Beijing and Washington. All of which makes investing in Hong Kong assets a gamble on an increasingly uncertain future.