Hong Kong Stocks Surge Into a Bull Market in Win for Government

(Bloomberg) -- Hong Kong’s rallying stock market is defying predictions of the death of the city in the wake of a new security law.

The Hang Seng Index jumped 7.8% in the three days after the law was imposed on July 1, its biggest rally since April 2015, and entered a bull market on Monday. The advance was led by mainland Chinese firms listed locally, with Geely Automobile Holdings Ltd. and China Life Insurance Co. jumping more than 29%, but Hong Kong firms have also seen sharp gains. The benchmark retreated 1.4% Tuesday, with volume more than two times the three-month full-day average.

A sudden rally in mainland equities and a strengthening yuan have stimulated investor appetite for Hong Kong shares, which were recently the cheapest relative to the U.S. since at least 2005. But regardless of the cause, a rising stock market will bolster claims by officials that the new law would restore both stability and prosperity to a city that has been wracked by protests.

Hong Kong Chief Executive Carrie Lam said Tuesday that the city’s financial markets have responded positively to the national security law. That’s at least the second time since May that Lam publicly attributes rising stock prices to the legislation, saying it reflects improving business confidence.

Such views seemed far-fetched in May, when news of the national security legislation first broke. The index fell almost 7% that month, clocking up the biggest drop relative to the MSCI All-Country World Index in more than two decades.

Yet it was apparent then that Beijing was determined to shore up the city as a financial center in the face of growing overseas concern. Waves of mainland capital flooded into equities as international investors dumped them, helping to strengthen the local currency. The Hong Kong Monetary Authority sold HK$7.2 billion ($925 million) of local dollars this week after the exchange rate rose to the strong end of its trading band against the greenback.

A flood of listings by Chinese firms is adding support. JD.com Inc. and NetEase Inc. last month raised $7 billion through secondary share sales in Hong Kong.

A rising stock market will do little to assuage concerns about the draconian nature of the legislation. Late on Monday, Hong Kong’s police force were granted sweeping powers from warrant-less searches to demands to take down Internet posts.

But given how cheap Hong Kong stocks are relative to history, and the intensifying momentum in equities in Shanghai and Shenzhen, the gains could have a way to run. An extended rally may bring some cheer to a city with a broken economy and uncertain future.

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