HONG KONG (BLOOMBERG) - Hong Kong's rallying stock market is defying predictions of the death of the city in the wake of a new security law.
The Hang Seng Index has jumped 7.8 per cent since the law was imposed on July 1, its best three-day gain since April 2015, and entered a bull market on Monday (July 6). The advance has been led by mainland Chinese firms listed locally, with Geely Automobile Holdings and China Life Insurance Co jumping more than 29 per cent, but Hong Kong firms have also seen sharp gains.
A sudden rally in mainland equities and a strengthening yuan have stimulated investor appetite for Hong Kong shares, which were recently the cheapest relative to the US since at least 2005. But regardless of the cause, a rising stock market will bolster claims by officials that the new law would restore both stability and prosperity to a city that has been wracked by protests.
Such views seemed far-fetched in May, when news of the national security legislation first broke. The index fell almost 7 per cent that month, clocking up the biggest drop relative to the MSCI All-Country World Index in more than two decades.
Yet it was apparent then that Beijing was determined to shore up the city as a financial centre in the face of growing overseas concern. Waves of mainland capital flooded into equities as international investors dumped them, helping to strengthen the local currency. The Hong Kong Monetary Authority sold HK$7.2 billion (S$1.29 billion) of local dollars this week after the exchange rate rose to the strong end of its trading band against the greenback.
A flood of listings by Chinese firms is adding support. JD.com and NetEase last month raised US$7 billion (S$9.74 billion) through secondary share sales in Hong Kong.
A rising stock market will do little to assuage concerns about the draconic nature of the legislation. Late on Monday, Hong Kong's police force were granted sweeping powers from warrant-less searches to demands to take down Internet posts.
But given how cheap Hong Kong stocks are relative to history, and the intensifying momentum in equities in Shanghai and Shenzhen, the gains could have a way to run. An extended rally may bring some cheer to a city with a broken economy and uncertain future.
