Financial Secretary Sounds a Warning on Hong Kong Stock Market Fluctuations

May 20, 2015 Updated: May 20, 2015

HONG KONG—Hong Kong’s stock market suddenly became much more active following the Easter holiday. Hong Kong Financial Secretary John Tsang said in a conference on May 18 that the increase in stock market activity since the second quarter has resulted in a record market daily turnover.

However, given the continual uncertainties in the global economy and asset price fluctuations, Tsang predicted that the stock market will be due for corrections in the foreseeable future. He reminded investors to watch the market closely and avoid taking excessive risks.

In April alone, the Hang Seng Index (HSI) rose 14 percent totaling 3,200 points, a monthly increase record since May 2009. However, the market entered the consolidation phase in May with the HSI falling continuously for days.

On May 15, the HSI gained more than 500 points as it was stimulated by reports in the local media of the launch of the Hong Kong Shenzhen Stock Connect over the weekend.

Though the reports were refuted on the social media platform of the Hong Kong Stock Exchange, the Securities and Futures Commission shied away from making any comments. Speculations were therefore rife that the reports could be accurate.

However, to the market’s disappointment, the reports failed to materialize. Coupled with the fluctuations in the mainland Chinese markets, the local market fell on May 18 with the HSI down 231 points on a market turnover of US$15.86 billion (HKD $122.99 billion.) The H-shares Index fell 83 points or 0.6 percent to close at 13,926.

Following Premier Li Keqiang’s request for telecom companies to lower their fees at an earlier date, all the major telecom companies were met with a sell-off. China Mobile (00941), the most heavily traded stock on a turnover of US$290 million ($2.266 billion,) fell 2.8 percent to become the worst-performing blue chip.

China Telecom (00728) and China Unicom (00762) were both down 2.3 percent. The blue chips generally fell, with the Hong Kong Stock Exchange (00338) losing 1.1 percent while Tencent (00700) lost 0.7 percent.

Both A-share markets were down. The Shanghai market fell 0.58 percent to 4,283, and the Shenzhen market fell 0.15 percent to 14,672.

Capital Inflow

A man looks at the monitor displaying the Hang Seng Index and stock market information in Hong Kong on May 18, 2015. (Bilong Song/Epoch Times)
A man looks at the monitor displaying the Hang Seng Index and stock market information in Hong Kong on May 18, 2015. (Bilong Song/Epoch Times)

The Hong Kong Monetary Authority and the Hong Kong Stock Exchange (HKEx) said they were unable to identify the source of the recent huge capital inflow. HKEx chief Charles Li said there is no way to track the source of the funds and asked the market not to engage in undue speculations.

However, HKEx chairman Chow Chung-kong said in the same event that the surge in stock market activity could be related to increased participation of mainland Chinese funds.

Chow said the average daily turnover in April had exceeded US$25.79 billion (HKD $200 billion,) and on April 27, the total market capitalization reached an all-time high of US$3.99 trillion ($31 trillion.)

“Some believe that the huge inflow of mainland funds into the Hong Kong market in such a short period might have attracted the inflow of funds from Europe and the United States. But no one can be sure that these funds would stay for long,” Chow said.

On a broader perspective, some think that Chinese capital is beginning to make its influence felt in the international market.

Underground Channels

Despite the huge inflow from mainland China, the daily quota of $10.5 billion in the Shanghai-Hong Kong Stock Connect was far from being fully utilized. On Monday, the utilization rate was only 3 percent.

It was quoted in the media that according to some security companies, 90 percent of the mainland Chinese funds came to Hong Kong through underground channels.

A fund manager agreed with the report and said that investors could only open accounts at authorized security companies if they wanted to trade through the Shanghai-Hong Kong Stock Connect, and the fees could be as high as 3 percent.

Therefore, many mainland Chinese investors chose to move the funds into the territory through underground channels and open trading accounts in Hong Kong. They formed long queues in many local security firms, waiting for their turns to open stock accounts.

The fund manager said the fund management in the mainland was very confused. Many funds operated without a license. The bull market in Hong Kong has therefore attracted huge capital inflow from the mainland for short-term profit gains.

Many local security companies also serve to fuel such activities, accepting deposits in the mainland and extending loans to clients to trade Hong Kong stocks. According to market information, big investors make daily transfers of funds amounting to US$25.79 billion ($200 billion.)

Individual investors are also beginning to jump on the bandwagon using similar means. During the last one and a half months, major shareholders from at least six companies have used their shares as collateral to obtain loans for speculating in the local market. Among them, five have pledged their controlling stakes for the loans.

An analyst from the Social Science Academy pointed out that Hong Kong’s biggest asset is its financial system. Chinese people see Hong Kong as a safe haven in which to place their funds.

He said Hong Kong’s refusal to have Alibaba listed in Hong Kong and its insistence on maintaining equal rights for shares of the same status was the right decision. Otherwise, he said, “Hong Kong’s tradition would be badly damaged.”

Translated by Stanley Ng. Written in English by Sally Appert.