Will market meddlers never learn? China’s government has made preparations to support the Hong Kong stock market, if needed, to create a positive atmosphere before July 1, when Xi Jinping is expected to visit the former British colony for the first time as president. State-backed institutions have set aside funds to ensure stable trading before the 20th anniversary of Hong Kong’s return to Chinese sovereignty, Bloomberg News reports.
Mainland authorities may mean well in wanting to insulate global investors from a local issue: the risk of renewed protests against Beijing’s perceived encroachment into the city’s affairs. Yet there are at least three reasons why their gambit won’t work. Even if it did, the long-run consequences would be damaging.
Leave aside the resources needed to prop up a USD4.4 trillion market that trades $9 billion in stocks every day. The first point to note is that Hong Kong’s exchange isn’t like those in China. The latter are dominated by retail investors who herd into and out of stocks depending on the prevailing sentiment. They were hardly calmed in the summer of 2015 by a ban on sales by major shareholders. With mainland stocks in free fall, a disastrous experiment with market-wide circuit breakers last year lasted all of four days.
In Hong Kong, by contrast, 44 percent of the free float in stocks comprising the Hang Seng Index is owned by institutions. To fund managers, any irrational, short-lived panic would be a buying opportunity.
They’re even shrugging off the most recent rout in the Chinese stock market, which has been sparked by fears over Xi’s deleveraging push. The Hang Sang China Enterprises Index’s valuation discount to the mainland’s CSI 300 Index has continued to narrow this year.
The second reason to resist intervention is legal. Any form of mass buying could fall afoul of the Securities and Futures Commission’s rules against market manipulation. Whether Hong Kong’s regulator would dare to make its displeasure known is debatable, but the legality of buying in concert in a supposed free-market haven raises questions.
Finally, not all rescues are born equal. When the Hong Kong Monetary Authority bailed out the stock market during the Asian financial crisis in 1998, the goal was to prevent a self-fulfilling prophecy of collapse that threatened to break the city’s currency peg to the U.S. dollar. While the move was controversial at the time, drawing scorn from the U.S. Federal Reserve, the city’s laissez faire reputation has survived – especially considering what the Fed has done with its balance sheet since 2008.
That reputation is worth preserving. Any unnecessary interference in Hong Kong’s stock market could forever raise risk premiums. If Beijing ever needed a bounty of reasons to stay away from spreading cheer and cash, its special administrative region offers them all. Nisha Gopalan, Andy Mukherjee
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