Favorgame3 at 02:20, 22 January 2008

2008-01-22T02:20:24Z

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Hong Kong's investors could use the Chinese government's help, but it isn't clear when that help may come.
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Specifically, what traders in Hong Kong need is for Beijing to finally open the doors for mainland citizens to trade Hong Kong stocks.
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Until that happens, one significant leg of support for last year's gains in Hong Kong shares is going to be increasingly wobbly. If that support is removed altogether, Hong Kong stocks could be in for a bigger bruising than they've already had.
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Traders in Hong Kong have been waiting for nearly five months for Beijing to move forward with a plan announced in August that would let citizens in the mainland invest in stocks in Hong Kong.
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The plan was seen as a way of taking pressure off China's emerging stock-market bubble: If Chinese investors have more destinations in which to invest their savings, less money will chase after each share in Shanghai.
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Expectations that piles of Chinese money would come into Hong Kong stocks had the Hang Seng Index surging in the months following the first announcement.
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At its worst, the buying was driven by "greater fool" sentiment: That stock-hungry and hyped-up Chinese investors would pay up for Hong Kong stocks that were, relative to their Chinese counterparts, downright cheap.
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The Hang Seng rose 55% from its August low to a late October high, following that news and the Federal Reserve's decision to slash interest rates in the U.S.
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Shares of Chinese stocks listed in Hong Kong, reflected in the Hang Seng China Enterprises Index, did even better, gaining about 85% over that period.
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Based on the prospect of coming inflows, investors in Hong Kong began to demonstrate a kind of immunity to global turmoil. That immunity had previously only been apparent in mainland China, and stocks in China and Hong Kong surged while other markets wobbled.
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But the money hasn't come. Instead, traders have heard mixed messages from government officials about when the plan may be launched, and what is holding it back.
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So these traders have gone back to worrying about the other factors that affect stock prices -- most recently the prospects for a U.S. recession and its impact on local economies.
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Both the Hang Seng and the enterprises index have returned to levels last seen in late August, though they remain well above their lowest point of the summer. The Hang Seng is about 21% above its mid-August lows, and the enterprises index stands about 26% higher than its August low.
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There is reason to think the plan will eventually be approved. Last week the head of the Hong Kong Monetary Authority, Joseph Yam, was reported as saying the plan is "an important project and we hope to start it soon."
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That has all been said before, though, and it isn't clear if Mr. Yam was just being hopeful or was actually reflecting the party line. Other officials, most notably Chinese Premier Wen Jiabao, have raised concerns about the plan in the past. Mr. Wen said the government had to first consider the potential negative effects the plan could have on both mainland and Hong Kong markets.
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With no clear sign of Chinese investors being approved to make their way into Hong Kong, it is easy to imagine either index revisiting August's lows.
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Several other Asian markets, from Singapore to Korea to Australia, are now very near those lows. Those markets didn't have the support of the prospect of tens of billions of dollars of Chinese money to keep them afloat.
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There is another risk: Recent selling in global markets, and the growing doom-and-gloom consensus for stocks, might be enough to spook even the most exuberant investor. What if Chinese players decide they don't want to buy Hong Kong stocks just yet?
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That isn't to say it is time to rush out and short-sell Hong Kong stocks, a tactic that involves the sale of borrowed shares in the hope of buying them back at a lower price later on.
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Even the biggest bear has to admit two notable risks to a short position in Hong Kong: That Beijing will approve the "through-train" when it is least expected and that money will indeed come pouring into Hong Kong; or that the Fed's rate-cut campaign (which, given the Hong Kong dollar peg to the U.S. dollar, has to be followed) will fuel a recovery in Hong Kong stocks.
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Hong Kong Continues China-Investment Vigil3 - Revision history

Favorgame3 at 02:20, 22 January 2008