This summer, when Hong Kong’s stock market slump seemed to have no end in sight, the city’s chief financial officer, Paul Chan, sprang into action, creating a task force to inject confidence into a market that was being battered. by global investors who distrusted China.
Hong Kong cut trade taxes and Chan toured Europe and the United States, promising measures to “allow investors to feel optimistic about the outlook.” However, investors were anything but optimistic and the city’s Hang Seng Exchange is among the world’s worst-performing stock markets this year.
The Hang Seng Index ended Friday, its last trading day in 2023, down 14 percent from the start of the year. Stocks in mainland China also posted losses this year, with the CSI 300, an index that tracks companies listed in Shanghai and Shenzhen, falling 11 percent.
Hundreds of billions of dollars flowed out this year as money managers and pension funds reduced their holdings in Hong Kong, which has long been a gateway for foreign investors wanting to put money in mainland China. The capital outflows were largely due to an economic crisis in China and increasing pressure on American investors to sell their exposure to Chinese companies.
“Many of the companies in the Hang Seng Index are essentially companies that are leveraged into China’s economic growth,” said Chetan Seth, Asian equity strategist at Nomura, a Japanese bank. “China’s weak economy has clearly affected the performance of Chinese stocks listed in Hong Kong,” Mr. Seth said.
The losses in Hong Kong and the mainland contrasted sharply with what happened in the United States, where inflation slowed and the labor market was strong. The S&P 500, which broadly tracks U.S. stocks, is up 25 percent in 2023, underscoring the diverging paths of the world’s two largest economies.
Global investors began the year optimistic that China’s economy would rebound after three years of strict pandemic rules and lockdowns. But when China fully opened its borders in January for the first time since 2020, many households were reluctant to spend. Private businesses failed and the economy slowed.
China’s turbulent real estate crisis has intensified the economic crisis and spread to Hong Kong. After years of overexpansion and borrowing from foreign investors in Hong Kong, almost all Chinese private property developers have collapsed.
Chinese real estate companies listed in Hong Kong were among the worst performing stocks. Property developer Country Garden, one of the biggest victims of the housing crisis, has lost almost three-quarters of its value this year as it approaches collapse.
Chan, the finance secretary, has blamed “misunderstandings caused by Western political prejudices” for the stock market’s poor performance, as geopolitical tensions between Beijing and Washington hit a low during the year. But 2023 was the fourth consecutive year in which the Hang Seng posted losses. During that same time, Hong Kong’s role as a financial powerhouse for Asia has diminished as it has been forced to align more closely with Beijing under a far-reaching national security law.
Hong Kong’s loss of autonomy from China has worried some global investors.
Hong Kong, a former British colony, was returned to China in 1997 with the promise that it would maintain a high degree of self-government under a policy called “one country, two systems.” For two decades, this allowed Hong Kong to define itself as unique and distinct from the rest of China, while offering financial access to the world’s second-largest economy.
But after citywide protests in 2019, Beijing imposed the national security law, which silenced political debate and stifled civic activity.
More than 100,000 residents have left Hong Kong in recent years, partly due to the security law and tough pandemic restrictions. Many young Hong Kong professionals still there have expressed a desire to leave, making it a challenge to recruit the talent that has helped the city function as a financial hub.
Hong Kong, once a major hub for Wall Street banks, suffered a drought of initial public offerings this year. Companies raised the lowest amount of money since 2001, leading to layoffs at financial institutions across the city.
Many international companies have stopped recruiting for new positions in Hong Kong. With less money coming into the exchange and fewer transactions, dozens of brokerages have also closed.
China’s slowdown, as well as geopolitics, elections in major economies including the United States, and central bank actions are likely to make 2024 another volatile year for Hong Kong.
Address some of these issues in an interview at a recent interview Speaking to the South China Morning Post, Chan said, “2024 will be a year of great uncertainty.”