Market pessimism provides break from rule-of-law pessimism

Good news for writers of the Hong Kong government’s wrathful press statements: the overseas media have other things to look at than the Jimmy Lai trial. The bad news: the other things include Hong Kong’s dwindling stature as a financial hub.

Bloomberg looks back at a pretty bad 2023…

It was supposed to be the year Hong Kong rebounded onto the world stage, leaving behind an era marred by street clashes, political crackdowns and Covid curbs.

Instead, 2023 turned out to be one of the worst for the financial hub in recent memory, at least as far as its markets are concerned.

The Hang Seng Index has fallen 16%, losing ground [in terms of market cap] to rivals in Tokyo and Mumbai, and putting it among the biggest decliners globally. Funds raised by initial public offerings are the smallest since the dotcom bubble burst. Home sales are on track to be the lowest for any year since records began in in 2002. Office rents have fallen to levels last seen 13 years ago.

Underscoring the malaise, the city has been dubbed the “ruins of an international financial center” on Chinese social media, a viral label rejected by financial services chief Christopher Hui.

…In a sign that Beijing is growing concerned, officials from China’s Ministry of Finance traveled to the city last week to meet with bankers from firms including HSBC Holdings Plc and Standard Chartered Plc to discuss ways to bolster the city’s hub status.

…Further deterioration next year would likely increase doubt over the Lee administration’s ability to meet the demands of an international city, and undercut Xi’s efforts to increase foreign direct investment needed to shore up China’s struggling economy.

One main reason is that the HS Index is dominated by Mainland companies, and China’s demographics, debt problems and ideology are all dragging on the country’s economy. Another is that Hong Kong’s own ideological rectification – including political trials – is bound to worry investors. The FT says…

[Hong Kong] now finds itself hitched to a slowing mainland economy. Additionally, competition from Chinese capital markets and a political crackdown by Beijing have left Hong Kong facing “an existential crisis as a major international financial centre,” according to [economics academic] Eswar Prasad

…Journalists, businessmen and lawyers have been arrested under security charges. The judges that preside over such cases are handpicked by Hong Kong’s top officials and there is a 100 per cent conviction rate. Local authorities have increasingly adopted tactics similar to those of mainland China against dissidents and others, including televised “confessions” and forced “repentance” letters.

…Faced with what a range of lawyers, bankers, professors and economists who spoke to the Financial Times describe as a “new reality”, foreign businesses and expats have continued to leave the city, their places taken by mainland firms and citizens.

It now seems to be ‘NatSec first’ rather than ‘business first’. In the Mainland, the SCMP reports that China’s state security ministry – not the economics one – warns about pessimistic comment on the economy as a national security threat…

“Talk concerning China’s decline is in essence an intention to create a ‘narrative trap’ or a ‘cognitive distortion’,” it said.

“It aims to doubt or deny China’s socialist system and attempts to strategically contain China’s development.

…“We still wonder if normal discussions about the problems of the economy will inadvertently cross the vague red line, now that Beijing clearly wants us to focus on the bright prospects.”

SCMP’s former editor notes in an op-ed that Beijing’s leadership wants ‘stronger economic propaganda and public opinion guidance to promote a positive narrative about the Chinese economy’…

The new directive seems to target online commentators and analysts who write research reports for clients at brokerages, consultancies and think tanks. Many online pundits have already seen their social media accounts suspended because of their frank and honest comments, and analysts have been warned they must be careful in their choice of words when writing about the Chinese economy.

One Hong-Kong-based fund manager told me that when sales people from Chinese brokers come to meet him, they first flash PowerPoint presentations on the bright prospects of the Chinese economy. After the presentation, they go on to share what they really think.

How is it possible to restore confidence if one has to be economical with the truth? No wonder the stock markets in Hong Kong and on the mainland fell on Wednesday, the first trading day after the work conference statement was released.

For a quarter-century or so, Hong Kong was a great place for stock investors because it was volatile – which can be fun – yet riding a major long-term uplift from China’s reform-driven post-Mao recovery. Reuters offers reasons why the great ‘maximum bullish’ days are finally over…

China likely grew 5%-or-so in 2023, outrunning the global economy. However, beneath that headline is the fact China invests more than 40% of its output – twice as much as the United States – suggesting a significant portion of that is unproductive.

That means many Chinese don’t feel that growth. Youth unemployment topped 21% in June, the last set of figures before China controversially stopped reporting.

University graduates who studied for advanced-economy jobs are now taking up low-skilled positions to make ends meet while others have seen their wages cut.

In an economy where 70% of household wealth is parked in property, home owners are feeling poorer. Even in one of the few bright spots of the economy, the electric vehicle sector, a price war is causing pain downstream for suppliers and workers.

The national pessimism could present President Xi Jinping with social stability risks, analysts say. If China does slip into a Japan-style decline, it would do so before ever achieving the kind of development Japan did.