Hong Kong Stocks Greet New Law With Gains, Backed by Mainland

(Bloomberg) -- Stocks in Hong Kong rose on their first trading day since new national security laws were imposed on the city, amid signs mainland Chinese buying was behind some of the gains.

The Hang Seng Index climbed 2.9%, led by property companies, and the city’s currency was near the strongest it’s allowed to trade. A measure of offshore China stocks surged 3.1%, the biggest gain in three months.

The positive reaction in stocks divided analysts and traders. Some said the gains reflected investor expectation that the legislation will deter protesters, which could help bring stability to the city’s streets and in turn encourage consumption. The analysts pointed to gains in local landlords like New World Development Co. -- which owns hotels and shopping malls -- as well as railway operator MTR Corp. as evidence.

“Though there were protests yesterday, the number of people that took to the streets was much smaller, and the 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.”

Others pointed to the guiding hand of the state, citing the Communist Party’s history of ensuring market stability around key anniversaries and politically sensitive events. One Hong Kong-based trader, who declined to be identified discussing client flows, said he handled several buy orders on behalf of a state-backed Chinese fund. Mainland-based buyers snapped up HK$5.1 billion ($656 million) worth of Hong Kong stocks.

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 remains to be seen.

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 U.K.

Investor confidence remains muted. The Hang Seng is in a bear market even as stocks in the U.S. and a benchmark of Asian shares recovered. Hong Kong equities lost almost 7% 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 has been traded below book value, meaning investors 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% 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 U.S. could also place the city even more firmly on the frontline of a battle between Beijing and Washington. All of which makes investing in Hong Kong assets a gamble on an increasingly uncertain future.

©2020 Bloomberg L.P.