Hong Kong Stocks at a 36 Percent Discount Show ‘Big Fish’ Are Fleeing China

The decline of Chinese stocks listed on the Hong Kong exchange accelerated on Monday, pushing their discount relative to global competitors to the largest in the last fifteen years, marking the latest sign of growing pessimism among international investors.

The Hang Seng Index of Chinese companies fell 2.4 percent, nearing levels last seen nearly two decades ago, while the mainland benchmark CSI 300 ended 1.6 percent lower. As a result, the gauge tracking price differences of domestic stocks relative to their dual listings in Hong Kong reached its widest amount since 2009, implying a 36 percent discount for offshore markets, Bloomberg reported.

Larger losses in Hong Kong, where some of the most influential and innovative Chinese companies are listed and where Beijing’s interference is somewhat less felt, paint an even worse picture of global investors’ sentiment towards the world’s second-largest economy. Signs of government intervention to support the financial market have increased in recent weeks as selling pressure continued despite a more optimistic Wall Street, where the S&P 500 index climbed to a record high on Friday.

Behind the seemingly endless sell-off of Chinese stocks lies a range of factors, from a deepening real estate slump to stubborn deflationary pressures, as well as uncertainty surrounding the trajectory of U.S. interest rates. The latest move by Chinese commercial lenders to keep their benchmark interest rates unchanged, following a recent decision by the central bank to maintain borrowing costs, may also have disappointed investors hoping for more aggressive stimulus.

– A significant number of investors in H shares are foreign institutional funds, and they have reallocated from Hong Kong to Japan and other Asian markets in their Asian allocation. Some institutional investors from the mainland may have greater restrictions on how much they can offload, and they also tend to have a bias towards the domestic market – said Redmond Wong, a market strategist at Saxo Capital Markets HK, referring to stocks listed on the Hong Kong exchange.

Stronger Policies Needed to Revive Stocks

Local stocks are often seen as a better barometer of the health of the world’s second-largest economy and a more accurate indicator of broader investor sentiment, Bloomberg writes. In comparison, trading in Shanghai and Shenzhen is constantly influenced by the intervention of Chinese regulators, with various restrictions – from short selling or initial public offerings to verbal warnings and direct intervention by state funds.

The HSCEI was just over one percent away from falling to its lowest level since 2005, and the Hong Kong benchmark Hang Seng also approached levels not seen since 2009. The biggest ‘brakes’ on Monday included Chinese tech giants Meituan and Tencent Holdings as well as electric vehicle manufacturers Li Auto Inc. and BYD.

The latest declines can be attributed to a ‘lack of short-term catalysts and outflows towards more attractive alternatives in the region,’ said Marvin Chen, an analyst at Bloomberg Intelligence. – Global markets are witnessing a surge in the chip sector, and this is an area where China and the rest of the world could go down different tracks due to geopolitical tensions – he added.

Sentiment is almost equally fragile in the mainland Chinese market, where the CSI 300 benchmark reached a new five-year low. The decline coincided once again with a spike in trading volume in a handful of exchange-traded funds tracking key indices, a sign that state buyers may be trying to limit the drop.

In less than a month into the new year, the indicator of Chinese stocks listed in Hong Kong has already lost 13 percent, making it the main benchmark with the worst performance in global indices. In comparison, the S&P 500 has strengthened by 1.5 percent.

The benefits of monetary easing by the People’s Bank of China have already been assessed, and ‘stronger’ policies are needed to revive stocks, said Eva Lee, head of Greater China equities at UBS Global Wealth Management, at a briefing on Friday, Bloomberg reported.