Hong Kong stocks have slumped to levels last seen during the 2008 global financial crisis. Chinese president Xi Jinping has appointed several ideological hardliners to the powerful Politburo Standing Committee. Foreign investors foresee the government’s limited patience with business will diminish further.
Everyone expected Xi to secure a third leadership term at the national congress of the Chinese Communist party. Hong Kong’s benchmark Hang Seng index plunged more than 6 per cent on Monday in response to the tone surrounding that event.
Hong Kong equities are at 13-year lows. The offshore renminbi has cratered too. Hong Kong’s drop was more than triple the fall in the two mainland benchmarks, the Shanghai and Shenzhen Composite indices. The onshore renminbi is stronger than the offshore renminbi. This all points to panic among overseas investors.
Their fear is warranted. Xi replaced more than half the Politburo Standing Committee with ideological purists. Li Qiang, the party’s top official in Shanghai who oversaw extreme lockdowns in the city this year, is set to become China’s next premier.
Xi used the word “security” 26 times during a two-hour speech at the congress. The party has amended its constitution to state explicit opposition to independence for Taiwan. Defence stocks including AVIC Electromechanical Systems, Anhui Great Wall Military Industry and Guangzhou Hangxin Aviation Technology were among the few gainers.
Downside impacts are broader. Hong Kong-listed shares of tech groups including Alibaba and Tencent fell more than 12 per cent on Monday. Property stocks also dropped to record lows. The new leadership is likely to continue crackdowns on these sectors.
Hong Kong real estate has largely escaped the strict zero-Covid policies applied on the mainland. The shares of developers, including Sun Hung Kai, Henderson Land and Swire Properties have fared comparatively well. Those days are numbered.
China’s new leadership team is unlikely to stunt growth completely. That could trigger public discontent. But Hong Kong’s economy will suffer all the same. Beijing has had little interest in doing the city favours since it crushed pro-democracy protests in 2019.
Some buyside analysts will argue the sell-off is simply a knee-jerk reaction among poorly informed foreigners. But in this case, distance lends perspective. Overseas domiciles permit selling that is politically tricky for locals. Where Hong Kong has led, mainland markets may follow.
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