Traders count on golden week respite amid Evergrande, power crisis after US$576 billion rout in Hang Seng members

·4-min read

China’s national holiday, known as the “golden week”, could not have come at a better time for stock investors in Hong Kong who have endured a punishing sell-off in the past four months.

A combination of factors, from regulatory crackdowns on tech companies to China Evergrande’s debt contagion worries, have turned mainland investors into a deadweight for Hong Kong stocks last quarter through the Stock Connect’s southbound trading link.

They were net sellers of HK$65.2 billion (US$8.4 billion) worth of Hong Kong-listed stocks over the past three months, according to the exchange data. Their withdrawals have contributed to US$576 billion of wipeout in the value of Hang Seng Index members since the end of May.

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While Hong Kong’s financial markets will be open for the whole week, the shutdown in the southbound link through Thursday may be a respite for local traders.

“Buying the dip at a slow and gradual pace will be a good strategy against the backdrop of a broader languishing market,” said Xue Wei, an analyst at Ping An Securities. Still, “there is a low chance that Hong Kong stocks will stage a reversal in the short term”.

Asia’s third-largest market has struggled with a waning risk appetite. A decline in Chinese manufacturing and a squeeze in power supply in many mainland provinces have added to concerns about potential default at China Evergrande, a property developer saddled with US$305 billion of liabilities.

The Hang Seng Index slipped 5 per cent in September, bringing the four-month rout to 16 per cent, the worst losing streak in almost three years. This year, the Hang Seng ranked among the bottom three worst-performing major equity indices globally, according to Bloomberg data.

The market will be banking on history for some boost. Stocks in the city have risen in four of the past six Golden Week holidays since the Stock Connect link was established in November 2014. The best was a gain of 8.1 per cent in 2015, and the worst was a 4.4 per cent retreat in 2018, according to exchange data.

That may depend on a quick resolution to Evergrande’s debt woes and how fast Chinese authorities can put their acts together to prevent the power crisis from spiralling out of control.

Evergrande’s “financial strife could restrict funding access for property companies and Chinese issuers, damage the asset quality of certain banks, and disrupt the real estate market, which is an important driver of economic growth”, said Michael Taylor, chief credit officer for Asia-Pacific at Moody’s Investors Service.

So far, the fallout has already spilled over into some sectors, causing a squeeze in the funding market. A sell-off in banking stocks has prompted a wave of buy-backs by lenders to stabilise their share prices.

Evergrande founder Hui Ka-yan is seeking to rescue his property empire from sinking under US$305 billion of liabilities. Photo: Handout
Evergrande founder Hui Ka-yan is seeking to rescue his property empire from sinking under US$305 billion of liabilities. Photo: Handout

China’s ongoing power crunch in at least 20 provinces will probably chip away 0.1 percentage point from third-quarter economic growth and 0.15 percentage point this quarter, according to Bruce Pang, head of macro and strategy research in Hong Kong at China Renaissance Securities.

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Sima Jing, a China strategist at BCA Research, has cautioned about further downside in the market.

“Property sector stocks in China’s on- and offshore markets have been beaten down by policy tightening and lately the Evergrande saga,” she said in a report on September 29. “These stocks have not reached their bottom.”

A rapid deceleration in the real economic activity and jitters in the financial markets could reinforce each other and spiral out of control, she added.

For GF Securities, Hong Kong stocks are not attractive yet for investors to pile in, even though the market is the cheapest by global standards at 10 times price-earnings multiple.

“Investors will remain cautious on the earnings outlook because of a broad-based slowdown and the neutral monetary policy,” said Ou Yafei, an analyst at the Guangzhou-based brokerage. “The weakness in Hong Kong stocks will persist.”

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