Article 23 Hong Kong National Security


08 Feb

Article 23 forced on HK, Implication for the market

At Noon HK time
HK -1,120pts (-4.6%) @ 23,160. T/O HK$88bn.
Also note CSI 300 -64pts (-1.6%) @ 3,850 at lunch
Taiwan -147pts (-1.3%) @ 10,861

Well it's probably safe to say that not many people expected China to force Hong Kong to adopt a security law that hadn’t been through Legco. The recent market movements and short activity suggests that like before when Article 23 has been mentioned it was thought it wouldn’t come to much and was just talk. At this stage we haven’t seen the detail of what is being proposed so there is still scope there for it not be as dramatic as we might think. Personally I think it will be Article 23.

So what has changed? I think President Xi has realised that the pro Beijing councillors in Hong Kong are not going to get it passed in Legco during the current session and are basically admitting they are going to lose the local elections in Sept.

At the time of writing the market is down nearly 4% and still moving lower. I would expect another down leg when Europe awakes to the news. I don’t think you can hedge this within HK. It is not something that will affect some stocks more that others, this is about the fabric of Hong Kong as an investing base.

For institutional investors I think the news make little direct difference; they are investing in China and they already accept the rules that the Party sets for life and businesses there. So nothing has really changed. For them the key will be the US reaction; if HK loses it special status or worse if the US further restricts US pension money going into Chinese companies then the market will just tank.

With that in mind I would think most institutions will basically take a wait and see attitude. They may buy some derivatives to try and limit the downside but outside of that it is difficult to see what they can do. In most cases they are mandated to invest in China, that is why there are here. There is a chance that China decides not to proceed, the motion will not be voted on until next week and it could be watered down or subject to delay. But having put it out there I don’t think they will be able to climb down on this. It is worth noting that President Xi has not put his name behind it directly so he has left himself some wiggle room should a climb down be necessary. Although knowing the party structure it is likely that any climb down on this would open him up to huge criticism from his opponents.

For tracker funds and ETFs there is no alternative. They are just driven buy demand for their products as people turn -VE they will sell.

For ordinary retail it's more of problem they live here and for many this is their pension money. Where else can they invests? Obviously they have all the world markets but in most cases they only know and understand HK and China stocks, it will not be easy to move into other markets; although the availability of ETF funds does make it easier but its a matter of market understanding and knowledge. For many they will look to move to cash and watch how this plays out. For the wealthy investors I think a lot of them have already diversified and moved funds internationally.

It's not just the stock market that will see a downturn but property sales are likely to be under pressure with the expectation of more protests ahead. Plus the determination from Beijing to push this through may mean that it is also prepared to forego international opinion and use the PLA to crush any resistance within Hong Kong.

Turnover is high already and coming on a Friday before a long weekend in the US will add to the downside.

The other big signal that people should be thinking about is that if this goes through and there are huge protests in HK (which is likely) and the China steps in with the PLA; that would be a huge warning that China doesn’t care about international opinion.

That is a real threat then to Taiwan; China has already been vocal this week that reunification is inevitable. With problems within China the move on Hong Kong and possibly Taiwan may be President Xi’s solution to deflecting the repercussion of the mishandling of the covid-19.

The question is has he been mis-informed by his advisers? Putin got away with it in Crimea so why shouldn’t Xi. That is something the world leaders will have to decide and that is what will decide the future of Hong Kong

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