China market blow-out has Hong Kong basking in financial hub glow

[HONG KONG] Less than a year after huge street protests prompted a re-think about investing in Hong Kong, a wild four-week ride in mainland China's stock markets makes the city's financial hub look like a beacon of seasoned stability.

China's many-pronged state intervention in its markets, aimed at steadying share indexes that plunged by close to a third, has played to Hong Kong's strengths as a proven, transparent market - and a safer entry point for those wanting a piece of China in their investment portfolios.

In quick time, the notion that Shanghai or Shenzhen can play a role as a major international financial hub has been put back potentially by some years.

Amid the carnage on mainland markets, Hong Kong's appeal has returned - with its decades as a thriving investment hub, rule of law, free market policies and independent judicial system.

"China's misfortune may prove to be Hong Kong's gain," said Mark Konyn, CEO at Hong Kong-based Cathay Conning Asset Management. "The Hong Kong market remains a reliable and well governed alternative for China exposure and could represent good value once the dust settles."

Beijing's careful measures in recent years to open up its economy to global investors and internationalise its yuan currency - and a doubling in its stock market value in just a few months - had begun to cast a shadow over Hong Kong's role as the gateway to China.

But the policy bazookas lobbed at rescuing investors nursing losses of more than US$3 trillion suggest Beijing is far from ready to let markets loose. "The past couple of weeks was a big wake-up call to everyone," said Richard Ji, Hong Kong-based founder of All-Stars Investment Ltd, which manages about US$900 million in Internet related companies. "This will serve as a big lesson."

China's heavy-handed market management - cutting interest rates, suspending IPOs, easing margin lending and collateral rules, corralling brokerages into buying stocks and major shareholders into not selling them - serves to underscore Hong Kong's reputation for a Western-style business environment, built on a deep pool of financial experience and expertise.

"The past week's events bring out Hong Kong's positive attributes and will help regain some of it lost glory," said All-Stars' Ji. "The rule of law, developed institutional investor base and government's low interference in markets are key differentiators that give Hong Kong the edge over Shanghai." As more than half of China's listed companies suspended trading in their shares and cowered on the market sidelines, Shanghai stocks gyrated. Hong Kong's Hang Seng index remained relatively stable, though its weekly decline of 4.5 percent was its biggest since mid-March last year.

By Friday's close, China's frantic efforts appeared to be gaining traction, with the CSI300 index of the largest listed companies in Shanghai and Shenzhen up around 12 percent in two days.

The market turmoil may also prove a setback for Beijing's lobbying for Chinese shares to be included in global indices such as MSCI's Emerging Markets Index, which would draw in foreign capital.

China will eventually get things right, but for now has lost some credibility, said the head of equity capital markets at a foreign bank in Hong Kong, who didn't want to be named.

"Any goodwill they developed with the MSCI, they have to rebuild that trust. At the moment, they need to get the market back on track." Given the large-scale stock trading suspensions, "index providers will not be in a hurry to add China to benchmarks,"said Konyn at Cathay Conning Asset Management.

In comments to reporters on Friday, Hong Kong's financial secretary John Tsang emphasised how the city's markets were operating in a smooth and orderly manner. "Our system and infrastructure are robust and are well equipped to meet the challenges during market fluctuations," he said.

In Shanghai, the mood is bruised, but not down. "It's going a bit too far" to say that Shanghai will lose its competitiveness and that capital market reform will be derailed, said Hong Hao, managing director and chief China strategist at BOCOM International. "This is the sort of market you haven't seen in 20 years. This is a market failure, but I don't think the big direction of reforms and opening up of China's capital market is changed."

REUTERS