Over the 25 years after the handover of Hong Kong’s sovereignty, Hong Kong has undergone tremendous changes in all segments of society. One most notable change during the past 25 years is the “Hang Seng Index (HSI),” which used to reflect the health of the Hong Kong stock market. It is now being dominated by technology stocks from mainland China. Seven of the top 10 Hang Seng Index constituent stocks are now mainland companies.
The Hong Kong stock market has become a “China offshore financial market,” moving further and further away from being a true global financial centre. On the other hand, due to factors such as the worsening Sino-U.S. relations, resulting in the potential delisting of Chinese stocks from Wallstreet; a tough zero-Covid policy; and the Hong Kong National Security Law, together they make it difficult for the CCP to achieve its economic goals.
Chinese Stocks Account for Two-thirds of HSI
The Hang Seng Index was launched in 1969, initially with only thirty-three listed companies as constituent stocks. Starting from June 13, 2022, the number of constituent stocks was increased from 66 to 69. The new stocks include SMIC (中芯國際) (0981), Zhongsheng Group Holdings Ltd. (中升控股) (0881), Orient Overseas (International) Ltd. (東方海外國際) (0316) and China Hongqiao Group (中國宏橋) (1378), while AAC Technologies Holdings Inc. (瑞聲科技) (2018) was dropped. SMIC, Zhongsheng Holdings and China Hongqiao are all Chinese stocks, while Orient Overseas (International) is a de facto Chinese company as it was acquired by China COSCO Holdings (中遠海運控股), another company under full Chinese ownership.
Before the handover of Hong Kong’s sovereignty in 1997, the representative constituent stocks of the HSI included CLP Power(中華電力), TVB (無綫電視), Cathay Pacific(國泰航空), and the likes. Today, Alibaba (阿里巴巴), Meituan (美團), CNOOC (中國海洋石油), China Mobile (中國移動) and other Chinese stocks are all listed in the sixty-nine constituent stocks, accounting for about two-thirds of the weighting and occupy a highly dominant position.
According to the National Bureau of Statistics (NBS) of China, the size of China’s economy has grown from US$962 billion in 1997 to US$17.8 trillion in 2021, and the representation of Chinese stocks in Hong Kong’s stock market has become increasingly dominant. Although Chinese companies only account for 53 percent of the number of listed companies in Hong Kong, Chinese stocks account for 78 percent of the market value of the US$4.8 billion Hong Kong stock market at the end of May this year.
Seven Chinese-funded Stocks Within Top 10 HSI Constituents
At present, 69 Hang Seng Index constituent stocks account for about 60 percent of the total market capitalization, an increase of more than five times in the past 15 years. Among the top 10 HSI constituent stocks, seven are Chinese stocks, and the remaining three are Hong Kong Exchanges and Clearing Ltd. (香港交易所), HSBC Holdings plc. (匯豐控股) and AIA Group (友邦保險集團).
At present, Chinese technology stocks have dominated the Hang Seng Index constituent stocks, to such an extent as replacing the financial services stocks that are the backbone of Hong Kong’s economy, and Hong Kong’s role as an international financial centre is deteriorating.
Factoring in such issues as the U.S.-China trade war, China’s implementation of the Hong Kong National Security Law (NSL), the pressure of delisting Chinese companies from the U.S., and China’s stringent zero-Covid policy such as mandatory testing and isolation, forcing Hong Kong to replicate likewise, Hong Kong is on the path to become isolated from rest of the world. All these would discourage tourist arrivals, slow down business activities, and ultimately make Hong Kong less competitive.
Looking at the trend of the “Hang Seng Technology Index” in the past two years, it was found that the index fell from a peak of 10,560.97 on Feb. 19, 2021 to the lowest point of 3,472.42 on March 15, 2022, a drop of 67.1 percent. Launched on 27 July 2020, the Hang Seng Technology Index tracks the thirty largest technology companies listed in Hong Kong, most of which are Chinese technology stocks, including Baidu (百度), Alibaba Group (阿里巴巴集團), JD.com (京東), Bilibili (嗶哩嗶哩), Xiaomi Group (小米集團), SMIC(中芯國際), Kingsoft (金山軟件), and the likes.
On May 13, 2022, the Hong Kong Census and Statistics Department announced an advance estimate of GDP for the first quarter (Q1) of 2022. It was down by 4.0 percent in real terms compared with the same period in the previous year, ending four consecutive quarters of year-on-year growth. A spokesperson for the Hong Kong government said that the Hong Kong economy faced enormous pressure in Q1 this year. The fifth wave of the pandemic and the implementation of anti-pandemic measures have severely hit a wide range of economic activities and economic sentiment.
Piles of Chinese Stocks to be Delisted
It is estimated up to 150 Chinese stocks in the U.S. may be delisted following escalation of the dispute between China and the U.S. One consequence is more and more Chinese concept stocks may move to be listed in Hong Kong. On May 20 2022, the U.S. Securities and Exchange Commission (SEC) announced another eight Chinese concept stocks to be put on a list pending delisting. These include Secoo Holding Ltd. (寺庫), AIH (醫美國際), China Natural Resources (中國天然資源), Moxian (BVI) Inc. (魔線集團), the likes. These are included in the 150 number.
Under the U.S. “Holding Foreign Companies Accountable Act (HFCAA)” of 2020, U.S.-listed companies must use an accounting firm that complies with the U.S. Public Company Accounting Oversight Board (PCAOB) standards for auditing. However, the CCP has long refused to let Chinese companies hand over their manuscripts to U.S. regulators, citing national security concerns. The Act stipulates that in case the SEC determines the audit report of any company as not up to standard for three consecutive years, it is liable to be delisted.
In late April 2022, Fang Xinghai (方星海), vice chairman of the China Securities Regulatory Commission (CSRC), said that negotiations between China and the United States on audit supervision cooperation were making progress, and it was believed that a mutual agreement could be reached soon. Analyses from some experts have it that most Chinese concept stocks with state-owned enterprises background will choose to delist from the U.S. On the other hand, technology companies may first list in Hong Kong and wait for the results of further negotiations between China and the U.S.
Earlier, UBS released its latest report on May 24, 2022, stating that under current condition of high uncertainty, such as the effects of Sino-U.S. relations, possible delisting of Chinese stocks, a tough zero-Covid policy, the Hong Kong National Security Law and other factors, China’s full-year GDP growth forecast was lowered to 3 percent from 4.2 percent, and JPMorgan Chase also lowered it to 3.7 percent from 4.3 percent on May 23. From all these estimates it looks likely the CCP’s expected annual growth target of around 5.5 percent may come to nothing.