Hong Kong riots

a brief-ish history

During the first part of the 19th century the UK’s stores of gold and silver were being depleted (in effect contracting the country’s money supply) to pay for tea imported from China.  London suggested to Beijing that they barter opium from the British colony India instead.  Beijing sensibly refused.  So in 1841 the British army invaded China to force the change.  The UK seized Hong Kong to use as a staging area and kept it once China submitted to its demands.  During a second Opium War (1856-60), launched when China again balked at the mass shipment of narcotics into its territory, the UK seized more land.

In 1898, China granted the UK a 99-year lease over the area it occupied.  This legalized the status of Hong Kong, which remained under the practical control of the “hongs,” a newer form of the old British opium companies, for much of the 20th century.

In the late 1970s Deng Xiaoping made it clear that the lease would not be renewed but that Hong Kong would remain a Special Administrative Region, with substantial autonomy, for fifty years after its return to China on June 30, 1997.  (For its part, the UK parliament decided Hong Kongers would find the climate of the British Isles inhospitable.  So these soon-to-be-former British subjects would be issued identity cards but no other legal protections–citizenship, for example–within the Commonwealth on the handover.  This is a whole other story.)

Hong Kong’s importance today…

The conventional wisdom at that time was that while Hong Kong China’s main goal in triggering the return was to set the stage for the eventual reintegration of (much larger) Taiwan, where the armies of Chiang Kaishek fled after their defeat by Mao.

Today Hong Kong is much more important, in my view, than it was in the 1980s.  Due, ironically, to the sound, and well-understood worldwide, legal framework imposed by the UK, Hong Kong has become the main jumping-off point for multinationals investing in China.  It’s also an international banking center, a transportation hub and a major tourist destination.  Most important for investors, however, is that its equity market not only has greater integrity than Wall Street but is also the easiest venue to buy and sell Chinese stocks (Fidelity’s international brokerage service is the best in the US for online access, I think, even though the prices in my account are invariably a day–sometimes three–old).

…and tomorrow

Mr. Trump has begun to weaponize US-based finance by denying Chinese companies access to US capital markets, US portfolio investors and, ultimately, the dollar-based financial system.  China’s obvious response is accelerate its build up of Hong Kong as a viable alternative in all three areas.  As with the tariff wars, Trump’s ill thought out strategy will most likely galvanize these efforts.

the riots…

Hong Kong has 27 years left to go as an SAR.  For some reason, however, Xi seems to have decided earlier in 2019 to begin to exert mainland control today rather than adhering to the return agreement.  His trial balloon was legislation under which political protesters in Hong Kong whose statements/actions are legal there, but crimes elsewhere in China, could be arrested and extradited to the mainland for prosecution.  This sparked the rioting.  These protests do have deeper underlying causes which are similar to those affecting many areas in the US.

…continue to be an issue

The recent change in Hong Kong’s stock listing rules (to allow companies whose owners have special, super voting power shares) and the subsequent fund raising by Alibaba seem to me to show that Beijing wants Hong Kong to become the center for international capital-raising by Chinese companies.  From this perspective, Xi’s failure to minimize disruptive protests by withdrawing the extradition legislation quickly is hard to understand.

One might argue that Xi, like Trump, is trying to reestablish an older order, purely for the political advantage it gives.  In China’s case it entails reviving the Communist Party’s traditional power base, the dysfunctional state-owned enterprises that Deng began to marginalize in the late 1970s with his move toward a market-based economy (i.e., “Socialism with Chinese Characteristics”).   I find it hard to believe that Beijing is as impractical and dysfunctional as Washington, but who knows.

My bottom line:  I think the Hong Kong situation is worth monitoring carefully as a gauge of how aggressively China is going to exploit the opening Trump policies have haplessly given it to replace the US as the center of world commerce–sooner than anyone might have dreamed in 2016.

 

 

 

 

 

 

 

 

 

 

 

 

 

Hong Kong back to earth

After four days of furious buying by mainland institutional equity investors, the Hong Kong market had a down day today.  This comes despite continuing healthy money inflow from the Shanghai-Hong Kong Stock Connect mechanism.  Although I didn’t watch the market closely (too late in the night for me), it seems as if sellers emerged in force in the afternoon when mainland money was unable to push the market much higher in the morning.

As one might expect, the big winners of the past week were the big losers of today.

Although I feel no overwhelming need to buy tomorrow, it looks to me that Stock Connect will end up setting a higher floor under China-related shares in Hong Kong than was possible when locals and US/EU international investors were the main participants in the market.

 

I’ve been a bit bemused at media surprise that many Hong Kong heavyweights have not participated in the rally.  The stocks in question have at least one of the following characteristics:

1.  they have broad global exposure but no particular focus on China,

2.  they’re controlled by UK interests and continue to be symbols of former colonial rule, and/or

3.  in the case of the “hongs” or trading companies, they are the 21st century form of the British-owned opium companies that were Hong Kong’s mainstay in the nineteenth century.  During the Opium Wars of the mid-1800s, Britain invaded China, forcing legalization of trade in the narcotic and effectively seized of Hong Kong Island and a chunk of the mainland from Beijing.  Companies strongly connected with this national humiliation are the last firms mainland investors are likely to buy!

What stocks are mainlanders buying?  They’re what one would expect:

–companies dually listed in Hong Kong and China, but trading at a discount in Hong Kong

–companies with attractive businesses in China, but listed only in Hong Kong.

Trading over the next few days will likely give us a better idea of the staying power and price sensitivity of mainland investors.  For me, the key question is whether Stock Connect buyers will let prices drift down before reentering.

 

surging Hong Kong stocks

a rising Hang Seng

The Hang Seng index is up by close to 10% over the past five trading days.  The Hang Seng China Enterprises index, which measures the performance of stocks dually listed in Hong Kong and on the mainland, has risen by 13%+.

Both figures understate the performance of many individual issues in the Hong Kong market over that span.  Hong Kong Exchanges and Clearing (HK: 0388), for example, is up by 40% over the past week.  BYD (HK: 0285), the battery/electric car company, has risen by 30%; Air China (HK:  0753) is 40% higher.

The bulk of the money fueling these purchases is coming from the mainland, through the Stock Connect mechanism (see my post on SC) that Beijing established about half a year ago.  The purpose of Stock Connect is to gradually allow larger flows of portfolio capital between Hong Kong and the mainland stock exchanges.  The idea is that at some point the two areas will act effectively as one.

Up until the past few days, SC flows between Hong Kong and Shanghai have been disappointing.  That changed drastically when Beijing gave the okay on March 27th for mainland mutual funds to use the SC mechanism.  I don’t know whether it happened again overnight, but Chinese mutual funds have been forced to stop buying because the daily limit to Stock Connect transfers has been reached early in afternoon trading over each of the past several days.

What is causing the surge?

Two factors:

–sharp upward movement in mainland stock markets had left the Hong Kong shares of dually-listed Chinese companies trading at extremely deep discounts to their equivalent shares in China (shares in Hong Kong still average around 20% cheaper), and

–strict market regulation, properly audited financials and the existence of companies traded in Hong Kong but not available on the mainland all make Hong Kong an interesting destination for Chinese portfolio money.

my take

As long as Hong Kong’s China-related shares trade at a steep discount to their Shanghai counterparts, arbitrage should be a support both for these individual issues and for the Hong Kong market as a whole.

For the first time ever, Hong Kong investors have got to keep a close eye on mainland exchange activity, since arbitrage can work both ways.

To the extent that any Hong Kong stocks are still about the physical place, Hong Kong, and not about the mainland, they’ll likely be significant laggards.

A tiny voice in the back of my head says that there’s something artificial about this week’s sharp rise.  If this were 1980s Japan, I’d be convinced that mutual funds had been strongly urged by some government ministry to use Stock Connect vigorously this week.  Could something like that have happened in China?  Maybe.  I think next week’s stock action will give us a hint as to whether the week’s exuberance is voluntary.

I have a lot of Hong Kong exposure already.  I have no inclination to chase stocks solely on the idea I’ll surf a mega-wave of incoming money.  Still, if this is genuine Chinese investor interest, I think we’re unlikely to see prices back at their week-ago levels any time soon.  And we’re probably going to see pretty regular mainland support for Hong Kong shares.  So I might be tempted to add on weakness.

 

 

October Macau gambling results

Just at midnight, New York time, the Macau Gaming Coordination and Inspection Bureau (DICJ) posted its report of aggregate casino win for the SAR during October.  The win, that is, the amount gamblers lost in the SAR, was MOP 28.0 billion (US$3.5 billion).  That’s up by 9.8% month-on-month, but down 23.2% year-on-year.

The result had been widely anticipated–and heavily publicized by the companies themselves, the government of the SAR and Hong Kong-based securities analysts.  Consensus estimates of the decline seem to me to have centered around -21% yoy.

The Hong Kong casino stocks were up a couple of percent in midday trading today when the DICJ report appeared.  Despite the wide publicity, the stocks immediately lost all their morning gains.  They drifted lower throughout the afternoon, ending down by around 3% for the day.

How could  stocks drop 5% on news that had arguably so fully anticipated?

I don’t think it’s that win was down 23% instead of 21%.  Both are equally weak.  More likely, in my view, is that short-term traders used the DICJ report to take profits after the stocks’ 15% gains in recent weeks.  It’s also possible that the market hadn’t grasped the current Macau casino situation as fully as I had thought.  It could be, as well, that the discounting mechanism for stocks nowadays in Hong Kong works more like the bond market in the US (reacting to strongly to current news as it hits the media) than the stock market.  (I doubt this last, but it has been a while since I devoted a serious chunk of my time to studying the Hong Kong market.)

my take

I’m not in a huge rush to buy, partly because I already have a pretty full weighting, both through the Hong Kong stocks and through WYNN and LVS.

My working hypothesis is that cyclical lows–10%+ below today’s close–have already been made.

Could the stocks drop another 5% from here–i.e., get halfway back to the lows of September?   …maybe, especially since the market upturn I anticipate will likely be in the spring or summer of 2015.  But it would take at least that much to get me interested again.  For now, I’m content to watch.