By Marie Chevoleau, Student at McGill University
Asia’s economic activity is set to contract this year for the third time since 2019. As the stock market hit a 13-year low on 20th October, forecasts are not optimistic.
The Hang Seng index dropped 9.64% last week and followed the sharp decline trend that started in 2020. One of the significant reasons is China’s Zero Covid Policy. Chief Executive John Lee’s maiden policy speech of 19th October increased these concerns.
As a byproduct of this sentiment, the index slid 4.37%, in just one day, on 21st October, starting at 15,894.75 and closing at 15,199.39. Between the speech on the 19th to the 25th of October, the benchmark has fallen by 9.58%, dropped by more than 6% on Monday 24th, and has only slightly begun to recover on the 25th of October. The model has never been that low since 2009.
The decline was driven by losses of Chinese tech companies, including Alibaba Group Holding Ltd (12% drop on the 24th)and Meituan (14% decline on the 24th).
Even if markets sometimes tend to overreact, these ongoing concerns have accelerated since the beginning of the Covid crisis in 2019 and have significantly impacted October. On 16th October 2022, the Chinese Communist Party Xi Jinping’s general secretary was already reaffirming the importance of the Zero Covid Policy, insisting on the goal of economic self-sufficiency and promising to regulate “excessive incomes” to achieve the purpose of “common prosperity.” China doesn’t seem to have any intention to modify its Zero Covid Policy nor align its economic strategy with market expectations. As a result, the HIS plummeted in October.
How could Hong Kong reverse the situation in the long run?
Now, what can we expect from Hong Kong? One aspect that played a role in the market’s loss of confidence in the Hong Kong economy was Beijing’s move to ban crypto trading and mining last year, which could suffocate the entire domestic industry.
China was emerging as the epicenter of the crypto industry. The country witnessed Binance Holdings Ltd. and the most significant Bitcoin mining firms within a decade. The ban in Mainland China disrupted Hong Kong’s strategic ambiguity about the legal status of crypto. By its proximity to China, Hong Kong suffered from the ban. The territory became less business-friendly, driving companies to set up camp elsewhere. Singapore and Dubai have greatly benefited from Hong Kong’s policy and have become more attractive finance hubs.
Despite the political turmoil triggered by the pandemic, there’s a good chance that Beijing will allow Hong Kong to operate as a testbed territory to follow the West a bit more and remain open for business with them.
What is certain is that after nearly three years of pandemic isolation, Hong Kong’s financial hub has deteriorated. While the average trading daily volume in Hong Kong was HK$128.6 billion ($16.5 billion) in January, the average trading daily volume in October was only HK$104.6 billion ($13.5 billion), representing a 19% decrease. Hong Kong must adopt new strategies if it is willing to compete and maintain its image as a leading international finance centre. Otherwise, while mainland China’s year of economic distress has dominated headlines in the region, an even worse situation could unfold in Hong Kong.
Marie Chevoleau
Marie is a French student at the IESEG School of Management. This year, she is studying at McGill University in Montreal. Marie is driven by challenges and new life experiences. Interested in strategy, history, and finance, Marie is also interested in people and would like to use her skills to improve working environments, especially for women. Her goal is to pursue a career in the corporate finance field to put her mathematical and analytical skills to good use while closely interacting with businesses and helping them with their different needs.