China said to prep Hong Kong stock support for Handover Day

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 city for the first time as president to mark 20 years of Chinese rule.

State-backed institutions have set aside funds to ensure stable trading before the anniversary of Hong Kong’s 1997 handover, according to people with direct knowledge of the matter, who asked not to be named as the information isn’t public. It’s unclear how much money has been earmarked or what market conditions would trigger government action. The Hong Kong and Macau Affairs Office of China’s State Council didn’t immediately reply to a faxed request for comment. The office of Hong Kong’s Chief Executive declined to comment.

While state-directed funds intervene regularly to manage swings in China’s USD6.6 trillion equity market, the government hasn’t been known to take an active role in Hong Kong. The former British colony, which sits near the top of global free-market rankings, is supposed to enjoy a high degree of autonomy under the “one country, two systems” principle enshrined in China’s power-transfer agreement with the U.K. Any attempt to influence Hong Kong stock prices risks provoking critics who say China is interfering too much in the city’s affairs under Xi’s leadership.

It could also add fuel to the debate over Hong Kong’s future as a financial center. Much of the city’s appeal to international investors and businesses comes from its strong rule of law and minimal government interference, attributes that set it apart from mainland China. Lines between the two markets have blurred in recent years with the introduction of cross-border exchange links and cooperation agreements between the Chinese and Hong Kong securities regulators.

“The stock connect has already brought mainland markets closer to Hong Kong, but there will be a lot of people who will be dissatisfied with this, at least in principle,” said Peter Garnry, head of equity strategy at Saxo Bank A/S in Copenhagen. “Expect some political noise.”

China has a history of influencing domestic markets during important political events. In the latest example, regulators have stepped up scrutiny of local stock traders as the government prepares to host representatives from more than 100 countries at a summit attended by Xi this weekend, according to people with direct knowledge of the matter. Policy makers were said to intervene during the last two annual meetings of Chinese lawmakers in Beijing.

Authorities may be especially keen to project an image of stability in 2017 as they prepare for a twice-a-decade Communist Party leadership reshuffle toward year-end.

China hasn’t confirmed that Xi will visit Hong Kong, but past leaders have tended to make the trip for every fifth year of the handover anniversary. Xi is expected to make a three-day visit for this year’s celebrations, the South China Morning Post reported this month.

The anniversary comes against a backdrop of elevated political tension in Hong Kong. The Occupy protests paralyzed parts of the city in 2014 and many residents are still angry over the lack of a direct election for their chief executive. Behind-the-scenes backing from China helped Carrie Lam win a resounding victory among the business and political elites who picked the city’s leader in March. She beat an opponent more popular with the general public.

Not all Hong Kong markets have been insulated from Chinese interference. When the yuan sank in offshore trading in January 2016, intervention by China’s central bank led to a short squeeze in Hong Kong. The episode dented the yuan’s appeal as an international currency, but criticism of the government’s actions was limited because influencing foreign-exchange markets is a common economic-management tool for governments around the world.

Meddling in Hong Kong’s stock market may be a different story. Aside from a Hong Kong government rescue package during the Asian financial crisis in 1998, shares in the city have been thought to be largely free of official interference.

If China’s government were to intervene, the purchases could run contrary to Hong Kong regulations on maintaining an orderly market, Low Chee-keong, an associate professor at the CUHK Business School and a former member of the Hong Kong exchange’s listing committee, said before Bloomberg News reported on China’s preparations. Low said that proving market manipulation is often difficult.

A Hong Kong Exchanges & Clearing Ltd. spokeswoman said the bourse doesn’t comment on market rumors, adding that market manipulation is an offense under Hong Kong law. The city’s Securities and Futures Commission didn’t immediately reply to an emailed request for comment.

“The government’s intervention is unwelcome in Hong Kong as it could boost risk premiums and pressure the valuation of stocks in the long term,” Daniel So, a Hong Kong-based strategist at CMB International Securities Ltd., said by phone. “Though it could boost stock prices in the near term.”

The government may decide it doesn’t need to intervene. Hong Kong’s benchmark Hang Seng Index is trading at the highest level since July 2015 after climbing 14 percent this year, outperforming the MSCI All-Country World Index by about 5 percentage points. The Hong Kong gauge is valued at 14 times trailing 12-month earnings, the most expensive level since December 2010, according to data compiled by Bloomberg. The gauge rose 0.4 percent yesterday.

“I don’t think anyone needs to support Hong Kong shares or the Hang Seng Index,” said Sandy Mehta, chief executive officer of Value Investment Principals Ltd. in Hong Kong. “It’s one of the world’s top-performing markets.” Bloomberg