Commentary on Political Economy

Monday 12 February 2024

Hong Kong’s glory days have come to an end


Stephen Roach is a faculty member at Yale, formerly chair of Morgan Stanley Asia, and is the author of ‘Accidental Conflict: America, China, and the Clash of False Narratives’ Stephen Roach · Feb 13, 2024


There is more to economic vitality than the stock market. But for Hong Kong, the market has always been emblematic of success. Imagine, a small city state with what had long been the world’s fourth-largest exchange (it is now fifth, according to Bloomberg data) — a global leader of new stock offerings as recently as 2019.

It pains me to admit it but Hong Kong is now over. A city I once called home and have cherished as a bastion of dynamism has had the world’s worst-performing major stock market over the past quarter of a century.

Since the handover to China in 1997, the Hang Seng index has been basically flat, up only about 5 per cent. Over that same period, the S&P 500 has surged more than fourfold; even mainland China’s underperforming Shanghai Composite has far outdistanced the Hong Kong bourse.

Hong Kong’s demise reflects the confluence of three factors. First, domestic politics. For the first 20 years after the handover, its politics were relatively stable. China was a passive Big Brother.

The wheels came off in 2019-20 when, under Carrie Lam, the Hong Kong leadership made the mistake of proposing an extradition arrangement with China that sparked massive pro-democracy demonstrations.

China’s response — the imposition of a new Beijing-centric national security law — shredded any remaining semblance of local political autonomy.

The 50-year transition period to full takeover by the People’s Republic of China had been, in effect, cut in half.

In the spring of 2019 at the onset of the democracy protests, the Hang Seng index was trading at nearly 30,000. It is now more than 45 per cent below that level at 15,750. Milton Friedman’s favourite free market has been shackled by the deadweight of autocracy.

Second, the China factor. The Hong Kong stock market has long been considered as a levered play on mainland China. 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 pandemic as well as cyclical pressures in the property market and local government financing vehicles.

These forces have sparked a threeyear bear market that has taken China’s broad CSI 300 index down more than 40 per cent from its spring 2021 peak.

Reflecting collateral damage on Chinese enterprises listed in Hong Kong and the city’s China-sensitive services sector, the Hang Seng has fallen 49 per cent over the same period.

Third, global developments. Since 2018, the US-China rivalry has gone from bad to worse. Hong Kong has been trapped in the crossfire.

Moreover, America’s “friendshoring” campaign has put pressure on Hong Kong’s Asian allies to pick sides. This has driven a wedge between Hong Kong and many of its largest Asian trading partners. Outsize consequences are likely, especially since Hong Kong’s foreign trade totals 192 per cent of its GDP.

There is no easy way out for Hong Kong from the interplay between these three developments. Hong Kong has no political discretion to chart its own course. While the Chinese economy might improve, I suspect any rebound is likely to be shortlived in light of lasting headwinds from a shrinking workforce and worrisome productivity prospects.

Nor do I see an easy path to the resolution of US-China tensions that would prompt a reversal of friendshoring.

The contrarian would argue, of course, that all this bad news is already discounted in an oversold Hong Kong market. China’s recent moves — government stimulus actions, jawboning and replacement of the chief securities regulator — may trigger a temporary bounce.

However, sceptical investors need to see more from Beijing than just another page from its timeworn countercyclical playbook. Until that happens, Hong Kong is likely to be mired in a trap made in China.

I will never forget my first trip to Hong Kong in the late 1980s. Notwithstanding a frightening, steep landing at the old Kai Tak airport, I was immediately taken with the extraordinary energy of the business community.

Back then, Hongkongers had both a vision and a strategy. 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.

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