Hang Seng Feels The Pain Of Chinese Adjustment

Growing concerns about the state of emerging markets and the global economy at large continue to weigh on risk sentiment as the latest bout of financial market volatility that began in China has quickly spread to other major world benchmarks. Hong Kong in particular, which has long benefited from the impressive rise of neighboring China, is currently feeling the brunt of the massive transition in underway in the Chinese economy. Since the opening of 2016, the Hong Kong Hang Seng equity index, a collection of the 50 biggest companies by market capitalization traded on the Hong Kong Stock Exchange, has seen valuations tumble as concerns about hiccups in its single largest trading partner impacts trade and consumption. With risks unlikely to abate over the near-term, the index could easily prove one of the worst performers in 2016 among major global investment instruments.

Trade Weakness

Hong Kong’s exposure to China is widespread, oftentimes serving as the destination for Chinese goods readied for re-export to other global trade terminals. China accounts for 58.00% of total exports from Hong Kong and 45.00% of imports, however, neither metric had a particularly positive 2015. Exports fell by -1.10% year over year through December while imports contracted by -4.60% over the same period. More importantly however has been the impact on growth and sentiment. For the third quarter, the annualized pace of GDP growth slowed to 2.30%, the slowest rate since the second quarter of 2014 in a growing sign that economic performance is set to undergo a period of more sluggish expansion.

The softness in trade is trickling into other areas of the Hong Kong economy, with the latest January manufacturing PMI underlining this point after staying in contractionary territory for 11 of the last 12 months. Industrial production has also been negatively impacted, shrinking for the last five quarters through the third quarter of 2015. Other looming areas of concern that will likely lead the Hang Seng index lower over the medium-term include the housing sector. Home prices in Hong Kong have fallen over -10.00% in the last 4-months and show no signs of stopping, driven mainly by an exodus of luxury buyers. The pace of sales is also concerning, with the lowest figure reported since record-keeping began in 1991. Other leading indicators of economic health such as consumption are also feeling the pinch.