Hong Kong’s formidable $4 trillion stock market is grappling with a significant liquidity problem that has emerged over the past three years, primarily driven by waning investor interest in trading stocks on the city’s exchange, resulting in more pronounced price fluctuations and difficulties for some Hong Kong-listed firms whose stocks struggle to trade on certain days.
This liquidity crisis has also hindered the exchange’s ability to attract listings from international companies.
In August, the Hong Kong stock exchange operator attributed the trading decline to factors such as a sustained high-interest rate environment, ongoing global economic fragility, and weak market sentiment.
However, market insiders argue that the root causes run deeper. They suggest that many Western and international investors have been divesting from Chinese stocks and reducing their exposure to the world’s second-largest economy due to geopolitical concerns and other factors.
This trend has disproportionately affected Hong Kong’s stock market, which allows for more fluid capital flows in contrast to mainland China’s tightly regulated exchanges.
The total market capitalization of the Hong Kong exchange has plummeted by over a third since its peak in mid-2021, representing a loss of more than $2 trillion in value.
Chinese companies comprise more than three-quarters of the market’s total worth. Furthermore, approximately one-third of Hong Kong’s stock trading volume now originates from traders and institutions in mainland China via a cross-border link, a considerably higher proportion compared to previous years.
James Fletcher, the founder of Utah-based Ethos Investment Management, specializing in small-cap stocks in emerging markets, noted that liquidity from foreign investors has significantly decreased.
Fletcher, who has been trading and investing in Hong Kong for nearly two decades, has observed that selling stocks on the city’s exchange has become increasingly challenging in recent months, with more sellers than buyers.
Bid-ask spreads, indicating the price difference between buy and sell offers for stocks, have notably widened for some companies’ shares.
Fletcher also highlighted a noticeable absence of American investors at a China investing conference he attended in June, compared to previous years.
He commented that there is a reluctance to make substantial investments in China.
The benchmark Hang Seng Index, reflective of Hong Kong’s stock market health, slipped into a bear market during the summer and recorded a new low for 2023. With a 13% loss this year, it appears poised for its fourth consecutive year of losses.
In response to these liquidity challenges, government officials in Hong Kong have established a task force to improve stock market liquidity.
This effort includes reviewing market participants’ concerns regarding relatively high taxes on stock trades in Hong Kong, particularly after mainland Chinese authorities recently reduced stamp duty on securities transactions.
An exchange spokesperson noted that they are exploring various avenues to enhance market liquidity and bolster Hong Kong’s standing as an international financial hub.