Economist Stephen Roach Declares ‘Hong Kong is Over’

While his opinion has triggered a strong reaction among some, the city’s indexes of real estate, finance, and other areas have corroborated what he’s said.

Stephen Roach, Senior Fellow, Jackson Institute for Global Affairs, Yale University, speaks on the panel "China's Future: The Sky Is Not Falling" at the 2016 Milken Institute Global Conference in Beverly Hills, Calif. on May 3, 2016. Frederic J. Brown/AFP via Getty Images

Stephen Roach, former Morgan Stanley Asia chair and once considered a friend of Beijing, recently sparked controversy with his statement, “Hong Kong is over.”

“It pains me to admit it, but Hong Kong is now over,” Mr. Roach wrote in a commentary in the Financial Times on Feb. 12.

According to Mr. Roach, political factors, along with international circumstances, are contributing to Hong Kong’s demise.

“The Hong Kong stock market has long been considered as a levered play on mainland China,” he wrote.

“For a variety of reasons, the Chinese economy has hit a wall. Structural problems — especially the dreaded three Ds — debt, deflation and demography — have combined with the impact of the Covid pandemic as well as cyclical pressures in the property market and local government financing vehicles,” he said.

“I will never forget my first trip to Hong Kong in the late 1980s,” the economist ended the article with his emotional reflection.

“China was just beginning to stir, and Hong Kong was perfectly positioned as the major beneficiary of what turned into the world’s greatest development miracle. It all worked out brilliantly, for longer than anyone expected. And now it’s over.”

While his article has triggered a strong reaction among some, the city’s indexes of real estate, finance, and other areas have corroborated his opinion.

According to Centaline Property, no transactions were recorded during the four-day Chinese New Year public holiday in the top 10 estates, which is a record low. Traditionally, when the property market was booming, Hongkongers regarded viewing properties as one of the Chinese New Year activities. Chinese tycoons would also take advantage of the long holiday to come to Hong Kong to view properties.

The new capital in Hong Kong’s property market comes mainly from the appreciation of the property market. For example, in the past decade, Hongkongers have a joke that “success requires a father’s efforts.” While there was no lack of parents giving cash to their children for the down payment, more capital came from the appreciation of assets purchased by parents in the early years.

As property prices continue to fall, this capital chain has broken. Based on “The Socio-Economic Impact of Home Ownership in Hong Kong,” published by the Legislative Council in 2021, the market value of private residential properties in Hong Kong in 2019 was around HK$12 trillion (US1.5 trillion) ). According to the statistics of the Rating and Valuation Department, the property price index for 2019 is 383 points. As of December 2023, it was 312.1 points, a drop of 18.51 percent. It is estimated that the assets in the property market have evaporated by HK$2.22 trillion ($280 billion) since 2019.

A total of 58,000 agreements for the sale and purchase of flats (including residential properties, car parks, and commercial and industrial properties) were registered in 2023, which was a record low for 33 years. The figure also reflects the fall in both price and volume of the Hong Kong property market.

The root of property market activity comes from the population, yet Hong Kong has seen a wave of emigration in recent years. With the number of British BNO visa applications reaching 182,600 as of July 2023 and the Canadian Lifeboat Immigration Scheme approving 27,100 cases, more than 200,000 people have left Hong Kong, not counting the departure of Hong Kong residents who originally held dual nationalities.

The 2022 Policy Address also recognized the loss of about 140,000 migrants in two years. The number of personal tax returns filed by the Inland Revenue Department has dropped from 2.97 million in the year of assessment 20/21 to 2.4 million in the year of assessment 22/23, a decrease of 570,000 returns.

Another source of capital for the property market is Chinese capital. The desire of Chinese tycoons to buy luxury flats in Hong Kong has also declined, with a total of 14 transactions in excess of $100 million recorded in Peak/South in 2023, a year-on-year drop of 33.3 percent and a new low for the past 10 years. On the one hand, Chinese tycoons have switched to Singapore; conversely, it also reflects the lack of capacity to take up luxury flats. The reason behind this is China’s economy and the financing ability dragged down by the Hong Kong stock market.

A woman walks past a real estate agent in Hong Kong on May 13, 2022. Isaac Lawrence/AFP via Getty Images

As for Chinese companies, they used to raise funds through debt-to-equity conversion or issuing new shares, so the rise in share prices reflects the increase in their fund-raising ability.

HK Stocks Fall, Foreign Stocks Rise

The Hang Seng Index hit a low of 14,961 points earlier this year, dropping back to levels last seen in 1997. Historically, the Hong Kong stock market has been a source of withdrawal for both mainland Chinese and foreign investors. When global unfavorable factors emerge, foreign funds often lead the way in selling off Hong Kong stocks. However, since the enactment of the National Security Law in 2020 and the subsequent “Zero-COVID” policy, there emerged a phenomenon of foreign banks singing praises for Hong Kong stocks while withdrawing simultaneously.

In contrast, foreign stock markets continued to rise. The Nikkei Index has risen by 15.2 percent this year, while the S&P and Nasdaq indices in the United States have each risen by over 4 percent. This is in stark contrast to the Hang Seng Index, which has fallen by 4.7 percent during the same period.

According to market statistics released by the Hong Kong Stock Exchange (HKEX), the total market value of Hong Kong stocks in 2019 was HK$36.59 trillion ($4.68 trillion). However, by November 2023, it had dropped to HK$31.12 trillion ($3.98 trillion), evaporating HK$5.47 trillion ($700 billion) in market value. Combined with the previously mentioned property market asset evaporation of HK$2.22 trillion ($280 billion) since 2019, a total of HK$7.7 trillion ($980 billion) has been lost in Hong Kong’s stocks and property markets. To put this figure into perspective, the Hang Seng Index would need to rise to nearly 20,000 points to compensate for these losses.

Pedestrians pass by the Hong Kong Stock Exchange electronic screen in Hong Kong, on March 24, 2023. Louise Delmotte/AP Photo

It is not difficult to see a 25 percent rise in a year when the market is booming. Hong Kong stocks used to have a bull market with a rise of more than 20 percent every few years. The last one was in 2017-2018, with a rise of nearly 50 percent. In January 2018, it even rose to a record high of 33,484 points, which was partly due to the tech stock boom in the United States. The Nasdaq Index rose repeatedly from 2016 to 2018, leading to a global tech boom at the time.

However, it is doubtful whether the same gains can be replicated. After 2019, Hong Kong was delinked from the international community, which, in essence, meant that Hong Kong’s stock movements were delinked from those of the United States.

U.S. stocks rebounded after the pandemic, with the Nasdaq reaching its all-time high of 16,212 points in 2021, a 64 percent increase from pre-pandemic levels. In contrast, the Hang Seng Index’s post-pandemic rebound only reached a high of 31,183 points, still below the 2018 peak. While it’s normal for Hong Kong stocks to lag behind U.S. stocks in terms of performance, the fact that Taiwanese and Japanese stocks have recently broken records along with U.S. stocks while Hong Kong stocks remain disconnected is notable.

Following the upward trends of U.S. stocks used to be “easy money,” but Hong Kong stocks now seem to be deviating from this global trend. With U.S. interest rates returning to normal levels of 5.25 to 5.5, the costs of mortgages and stock financing remain high. The era of easy money, where investors could borrow at low-interest rates to invest in stocks, is fading away. Hong Kong’s last hope lies in a U.S. interest rate cut, but strong economic indicators in the United States have repeatedly pushed back expectations for such cuts.