KF Spotlight : Keeping A Close Eye On HSI


Prepared by : Aron Liew, CFA and Zainal Aiman

A year since massive protests broke out in Hong Kong due to a proposed extradition laws, the political crisis in Hong Kong escalated to new heights when the Chinese government approved a sweeping national security law for Hong Kong on June 2020. The decision came after angry protests last year and this could be enacted within the next few months. The move has prompted concerns inside and outside of Hong Kong.

With public rallies and protests declining in the first few months of the year in response to the COVID-19 pandemic, protests began to erupt again in response to China’s latest decision. In retaliation, the Hong Kong administration deployed thousands of police throughout the city. Outside of Hong Kong, major countries like Australia, United Kingdom, Canada and United States had issued a joint statement strongly criticising the planned law. Meanwhile, in United States, President Donald Trump announced that the US will no longer treat Hong Kong and China separately on several major issues, including trade and extradition.

As one of the key global financial centres, any political upheavals in Hong Kong can bring major impact to its economy and thus can affect the global financial markets. In this paper, we explore the current situation in this land known as the Pearl of the Orient, its impact to the financial market and how traders can navigate the situation moving forward.

Data as at 30/06/2020Source : Bloomberg

One Country, Two Systems : An Important Context to know
  • Hong Kong was a British colony for more than a century before the British handing the sovereignty over to China, under the principle of “one country, two systems”. This principle would provide Hong Kong a status of “Special Administrative Region” of China with its own constitution, currency, passport and official languages.
  • This principle is preserved in a document called the “Basic Law” which is regarded as Hong Kong’s mini constitution.
  • The “Basic Law” protects rights such as freedom of assembly and freedom of speech which are non-existent in China, and also sets out the structure of governance for the territory.
Profile of Hong Kong

Source : Census and Statistics Department

What is the National Security Law?

China has passed the new security law for Hong Kong on 30 June 2020. The law consists of 66 articles where the basic idea is to outlaw the secessions, subversion, terrorism and foreign interference in Hong Kong.

Few Details of the Law
  • A set up of a national security office for China in Hong Kong to collect intelligence and handle crimes against national security
  • Permission for Hong Kong leader to appoint specific judges to hear national security cases
  • Provision of power to mainland China to “exercise jurisdiction” over cases that “jeopardize national security under specific circumstances”.
A Recap on the Hong Kong Protest

On 3 April 2019, Hong Kong’s government introduced plans for changes to legislation that would allow for criminal suspects to potentially be extradited to mainland China. This has brought massive criticisms among the citizens as the bill could undermine Hong Kong’s legal freedoms and might be used to silence the dissidents. What came next was an unexpected protest that prolonged for a long period. The protests which were initially over the extradition bill, had escalated into other four demands which are (i) an independent probe into the use of force by police, (ii) amnesty for arrested protesters, (iii) a halt to categorising the protest as riots and (iv) implementation of universal suffrage.

Timeline of the Protests

April 28, 2019

Tens of thousands of people marched on Hong Kong’s city assembly building, the Legislative Council, to demand the scrapping of the proposed amendments to the extradition laws

May 30, 2019

Hong Kong’s Chief Executive Carrie Lam determined to push the bill through the legislature and Hong Kong introduced the concessions to the extradition bill

June 9, 2019

An estimated one million people marched to the government headquarters to protest and the demonstration continued until July 1st during anniversary of Hong Kong’s handover to China

August 12, 2019

Although Carrie Lam had reiterated the extradition was “dead”, the protest still proceeded for the ninth consecutive weeks which had also spread to airports caused hundreds of flight being cancelled

September 4, 2019

After month of protests, Carrie Lam finally announced she would withdraw the highly controversial extradition bill. Nevertheless, demonstration still continued

October 23, 2019

The extradition bill is formally withdrawn. However, the country was shocked when data released by end-October showed that Hong Kong slid into recession in Q3 2019

November 24, 2019

Hong Kong held its District Council Election which saw the Pro-democracy group won a majority of seats in all 18 councils

Source : Reuters

How Did The Stock Market React?

In 2019, Hong Kong stock market kicked off the year with a good start as both indices were in upward momentum for the first quarter. The narrative began to change in the second and third quarter amid the relentless anti-government protest and US-China trade war. As soon as the political situation began to alleviate and the trade war showed some signs of hope, market began to recover in the fourth quarter of 2019.

The positive momentum was carried over into early January 2020 as both indices hit their year-high in mid-January. However, both indices plunged to their lowest level for the year as soon as the news of COVID-19 pandemic began to dominate the market. Market eventually bounced back in Q2 2020 as the market began to recover amid the reopening of economy.

Q1 2020

HSI (%) : -16.27

HSCEI (%) : -14.09

  • Market was initially on an upward trend for the first half of January due to the success of US-China trade deal on 15 January 2020.
  • Market slumped afterward in line with other global major markets on fears over the spread of COVID-19 globally.

Q2 2020

HSI (%) : +5.81

HSCEI (%) : +3.76

  • Market recovered in the second quarter of this year in line with other global major markets on hopes of economic recovery as most of countries reopened their economies.
  • However, the upward trajectory came to a halt when local political tension rose amid the plan on introducing the national security law in Hong Kong by China.

Source : Bloomberg

Impact to the Hong Kong Economy

Generally, most of the major stock markets in the world declined in the first half of 2020 with HSI and HSCEI among the worst performers.

Hong Kong has entered its first technical recession in a decade in Q3 2019 when the economy shrank for two consecutive quarters. Its economy contracted 2.90% and 3.0% in the third and fourth quarter of 2019, respectively, due to the anti-government protests and the protracted US-China trade war. Unfortunately, the region fell deeper into recession in the first quarter of this year as the GDP shrank by 8.9% due to the impact of COVID-19 pandemic. The last time the city suffered a recession was in 2009 in the wake of the Global Financial Crisis.

Source : IMF and HK Census and Statistic Department

What are the economic measures taken by HK so far?

Monetary Measures

  • Hong Kong Monetary Authority (HKMA) lowered its countercyclical capital buffer imposed on banks to 1% from 2%
  • The base rate were reduced by 64 basis points to 0.86%

Fiscal Measures

In combating the recession and COVID-19 pandemic effect, Hong Kong government had unveiled 3 round of stimulus package totalling HK287.5 billion with the details are as follows :

1) Hong Kong 2020-2021 Budget of HKD120 billion

  • An additional funding of HKD150 million to Hong Kong Trade Development Council for organising various initiatives to promote Hong Kon
  • Waive the stamp duty on stock transfers paid by ETF market makers in the course of creating and redeeming ETF units listed in Hong Kong
  • Issue green bonds totalling HKD66 billion in the next five years
  • Provide tax concessions for the ship leasing business, including a profits tax exemption to qualifying ship lessors and a half-rate profits tax concession to qualifying ship leasing managers
  • Implement the two-way wealth management connect scheme in Guangdong-Hong Kong-Macao Greater Bay Area as early as possible

2) Anti Epidemic Fund of HK30 billion

  • An allocation of HKD16.9 billion to provide one-off cash injections to retailers, food and drink service providers, transport companies, students, the arts and culture sector, guest houses and travel agents
  • A provision of HKD10.19 billion to fight the virus that consists of support to hospital authority, more investment in technology to boost production of surgical masks, and aid for various sectors

3) Stimulus Package of HKD137.5 billion

  • A provision of HKD80 billion of Employment Support Scheme to encourage employers to retain staff through provision of a wage subsidy to benefit ~1.5 million employees
  • Additional 16 types of support for businesses including tutorial schools and the travel industry with the amount totalling HKD21 billion
  • Government rental concessions from Apr to Sep 2020 to increase from 50% to 75%

Source : Coronavirus.gov.hk

Factors to Watch For In The Second Half of the Year

1) American Response on the Hong Kong Political Situation

Earlier on in May, US President Donald Trump had already stated that he would “take action to revoke Hong Kong’s preferential treatment as a separate customs and travel territory from the rest of China”. By end of June 2020, US has already begun to remove Hong Kong’s special status by halting the defense exports and restricting the city’s access to high technology products. The revocation could damage Hong Kong’s status as one of Asia’s premier financial hubs. Under United States-Hong Kong Policy Act of 1992, Hong Kong benefited many arrangements including lower trade tariffs. If further revocation happens, US might impose higher tariffs like what they did to mainland China.

2) A Possible Return of Protest May Further Impede Recovery Efforts

There is some speculation that if the COVID-19 situation seems under control, a massive protest may continue in Hong Kong streets soon following the imposition of China’s security law in Hong Kong. Earlier in May, protests had begun to return to the city after the news of the imposition were released and in early July, thousands of people gathered for another round of protest where 370 of them were detained. If the situations worsened, it is likely the recession will be further extended and impact Hong Kong’s capital market.

3) Concerns Surrounding Resurgence of US – China Trade War

2019 saw Hong Kong’s stock market trading in a roller coaster mode where one of the major causes was the prolonged inconclusive US-China trade war. Thanks to the conclusion of the Phase One trade in Jan 2020, the global market including HSI began to recover before the unprecedented COVID-19 pandemic took over. Nevertheless, the animosity between the two largest economies seemed to re-escalate amid the fresh dispute happened between them. In April, US President had threatened to restart the tariffs on China as he claimed that the country is “accountable” for the COVID-19 outbreak. Subsequently in May, US senate unanimously passed a bill that could force Chinese companies to give up their listings in US stock exchanges. As an open economy, the re-escalation of US-China trade war could cause a major impact to the capital market.

4) The Effectiveness of Hong Kong’s Authority in Combating COVID-19 Pandemic Might Provide Support to Local Market

Unlike any other countries in the world, Hong Kong managed to contain the spread of the COVID-19 pandemic without enforcing any lockdown. According to a study by The Lancet Public Health, the authorities implemented a combination of border entry restrictions, quarantine and isolation of cases and contacts, together with some degree of social distancing to flatten the pandemic curve. Nevertheless, as an open economy, some segment of economy might get affected since the pandemic situation across the globe is still in a struggling stage. However, the effectiveness of the authority in its anti-pandemic measures may lead to a faster recovery than other countries.

5) The Large Scale Stimulus act as a Strong Cushion

On 8 April 2020, Hong Kong government had unveiled a new round of stimulus package of HKD137.5 billion to support the businesses and individuals affected by COVID-19. This latest package complement the HKD120 billion relief package announced in the 2020-21 Hong Kong Budget and also the HKD30 billion Anti-Epidemic Fund approved by Legislative Council on 21 February 2020. In total, the relief amounted almost to HKD290 billion which represents approximately 9.5% of Hong Kong’s GDP. With this, one can conclude that Hong Kong in a good position to support their economy including the stock market from any major volatilities.

A Short Term Price Outlook for HSI

In line with global markets, HSI was on a downward trend since the beginning of the year and hit its lowest level of 21,696.13 on 23 March 2020 due to the impact of COVID-19 outbreak. Since then, market began to recover on the news of reopening of economies across the globe. Based on the technical chart above, the strong support and resistance level were seen at 23,035 and 25,157 respectively as market consolidated around that range.

A bullish crossover on MACD signal was formed in late June, breaking the previous resistance level of 25,157. In the near term, we expect the index to maintain its upward momentum and would face a strong resistance level of 26,306. If this level is broken, we expect HSI to rise further and may challenge the next resistance level of 27,280. Overall, we expect HSI to trade around range of 24,000 and 27,000 in the near term.

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