Will HK Stock Market Slump Threaten Financial Industry?

Hong Kong Stock Market Slump Sends Ripples Through The City

Hong Kong's stock market is facing a significant slump, sending ripples through the city's financial industry. This year alone, thirty local brokerages have closed their doors, following a record-breaking 49 closures in 2022, according to data from the Hong Kong stock exchange. The prolonged decline in the Hang Seng Index, now heading for its fourth consecutive year of losses, has reached an all-time low, eroding investor confidence. The market's average daily turnover has dropped by 14% compared to the five-year average, and the IPO market is experiencing its worst year since 2001.

The impact of the market downturn is being felt most acutely by small and medium-sized brokerages, heavily reliant on trading commissions and margin businesses. A survey conducted by the Hong Kong Securities Association earlier this year revealed that over 72% of local brokers suffered losses in the previous year, with at least a quarter planning to scale down operations in the current year.

According to a report made by Bloomberg, the lack of liquidity in Hong Kong stocks is a growing concern. Tony Cheung, an execution consulting specialist at Instinet, pointed out that Hong Kong has the widest bid-ask spreads in the Asia Pacific region. This has increased trading costs for institutional investors, further dampening market activity.

The ongoing slump in the stock market, coupled with job losses, raises questions about Hong Kong's position as Asia's top international finance centre. The city's extreme pandemic restrictions and Beijing's imposition of national security legislation have added to the uncertainties. Global investors have divested a significant portion of their Hong Kong holdings in the past two years, considering China "irrelevant" from a global portfolio perspective.

The dearth of deals has intensified concerns about the market's health. This year is poised to be the worst for Hong Kong IPOs since 2001, with only US$5.1 billion raised compared to US$52 billion three years ago. Foreign funds have been fleeing due to a struggling economy, weak consumption, strained US-China ties, and a property crisis.

Wall Street banks are downsizing their operations in Hong Kong as a result. Goldman Sachs and Morgan Stanley have conducted multiple rounds of layoffs, and UBS Group AG has cut investment bankers in Asia. The tough hiring market is expected to continue in 2024.

To address the downturn, Hong Kong's government has taken steps such as reversing a stamp duty hike and ensuring markets stay open during severe weather. However, challenges persist, including high borrowing costs and weaknesses in mainland China's economy.

Experts suggest that a cosmetic change like cutting stamp duty is insufficient. Hong Kong's stock market revival relies on a shift in US monetary policy from tightening to loosening and more aggressive easing measures from Beijing. Wall Street banks have also lowered their expectations on Chinese stocks, further dampening investor sentiment.

The length and severity of this cyclical downturn in Hong Kong's stock market could impact its status as a global financial centre. Only when macro and underlying corporate fundamentals improve can the market see a turnaround in performance and increased liquidity.

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