This strangely parallels the new normal where Hong Kong is back to business – but it is a different economy, dominated by the fortunes of the Chinese economy.
Brave talk about Hong Kong coming back will only come to fruition when China recovers from this uncharacteristically sluggish period. We may not have long to wait. Markets tend to move before any signs of green shoots in the real economy.
The Shanghai and Hong Kong markets suffered under contact with bad news in the first three weeks of this year, but quickly reversed, with the former scoring 2.2 per cent by quarter end. Hong Kong lost 12 per cent in the big January fall but by the end of the quarter, had risen by 11 per cent from that low.
This column called the bottom of the Hong Kong and China stock markets in February. This was neither guesswork nor gut feeling, but an analysis based on the Chinese authorities being imperilled to kick-start the sluggish economy. Only last month, Kristalina Georgieva, managing director of the International Monetary Fund, bluntly told top-level decision-makers at the China Development Forum that China’s economy was at “a fork in the road”. It must choose between past policies or “pro-market reforms” to unlock growth.
Investors must decide which of the two highways the Chinese authorities are going to take. The results of the past are looking uncertain; the need for growth is more urgent.
Over the last six months, there have been a scrum of small announcements which add up to a sizeable injection of liquidity into the economy. President Xi Jinping tackled American CEOs in Beijing by laying out the case for more inward investment.
The People’s Bank of China (PBOC) has been instructed to resume the trading of treasury bonds for the first time in 20 years, instead of relying only on relending tools and bank credit limits to inject liquidity. The PBOC may also issue “ultra-long term” bonds – possibly of 30–50 years and issued only on three previous special occasions – to hold up the debt-ridden real estate and local government sectors.
The authorities have taken many small measures rather than using one big boot, for fear of damaging the yuan. Yet weak currencies improve exports, which strengthens currencies – a J curve that takes time and patience. The stimulation of the Chinese economy looks like a rolling maul of recovery. Last weekend’s manufacturing figures showed expansion after contracting for five consecutive months, even if the property sector continues to lag.
China’s poor market performance contrasts with the unexpected strength of major stock markets in the first quarter. The boom in artificial intelligence was supported by confident consumption, low unemployment and good business growth funded by post-Covid liquidity.
Despite the backdrop of two wars, the S&P 500 index in the US gained 10.2 per cent in the quarter, its best start to the year in five years. Benchmark stock indices in Japan and Europe were up by 20.6 per cent and 12.4 per cent respectively, helped by a stronger dollar.
Let’s not confuse pumped-up stock markets with real economic health
The Chinese authorities will note that the mere hint of reflation by the Japanese has driven the market up by around 40 per cent since February 2021, and it finally crossed the all-time-high line after 35 years. By comparison, the Shanghai and Hong Kong markets are at the bottom of the pack, with key indices still halfway down from record highs. There is room for recovery in the Chinese markets even if world markets look to be worried anew about rising interest rates.
Hong Kong is an option on the Chinese market and when China does well, our markets will score even better. Stock prices are a bellwether of confidence; they see through humbug, and are not pacified merely by fine words or an inspiring half-time speech from the coach.
China wants a stable Hong Kong economy, its policy flip-flops kicked into touch. Hong Kong is returning to the role it was made for – to be a level playing field for business, with decisions made by businesspeople. The roaring crowds will be cheering on their favourites this weekend – but there will be no shout louder than that for the Hong Kong China team.
Dr Richard Harris is chief executive of Port Shelter Investment, a veteran investment manager and writer – and is in his 61st season as a rugby player
