Hong Kong’s Loss of Autonomy Is a Sideshow for Financial Markets

(Bloomberg) -- For investors, Hong Kong’s fading autonomy is becoming irrelevant.

The same day that pan-democratic legislators announced they would quit en masse in protest against new rules allowing disloyal lawmakers to be disqualified, the MSCI Hong Kong Index jumped to an almost nine-month high and the city’s currency was little moved. Unlike in May, traders aren’t betting on depreciation -- liquidity is so ample in the foreign-exchange market that Hong Kong dollar one-year forward points actually turned negative.

Since Beijing’s imposition of a far-reaching national security law on the former British colony in June, authorities have taken aggressive steps to target potential opponents of the Communist Party. While the initial news of the crackdown spurred a stock crash in late May, the MSCI Hong Kong has since rallied about 20%. The lack of unrest, compared with 2019’s protests, is proving helpful for stability in markets.

A bigger concern in the local stock market right now is Beijing’s efforts to rein in its most powerful private-sector firms. Last week, an initial public offering by Ant Group Co. in Hong Kong and Shanghai was pulled by policy makers, shocking the investment world. Then this week Beijing unveiled regulations to toughen oversight over the internet industry. The result was a $290 billion wipeout in stocks from Alibaba Group Holding Ltd. to Tencent Holdings Ltd.

For Hong Kong-based companies, however, the newsflow has been more positive. The unveiling of a travel bubble between the city and Singapore lifted shopping mall operators, while the global rotation into value stocks sent flows into the MSCI Hong Kong index, which is still trading near the widest discount in a decade relative to global stocks.

Chinese traders are also piling in, buying a net $1.2 billion of the city’s shares on Nov. 11 through the trading links. The MSCI Hong Kong index’s eight-day, 11% surge sent buying momentum to its highest level in 12 months. And while the index lost 1.3% on Thursday after its longest winning streak in more than two years, all but four of its 40 members are still up for the month.

©2020 Bloomberg L.P.