Hongkongers have much to complain about these days – mainlandisation of our schools’ curricula, mainlandisation of public spaces and leisure facilities, and most recently, even mainlandisation of street performances.
In recent months, however, another “takeover” has been happening right under our noses, but has largely gone unnoticed amid controversial electoral reforms grabbing the headlines. The Hong Kong stock market, a long-standing bellwether of the local economy, is rapidly taking on “Chinese characteristics”, and this trend bodes ill for the territory’s position as a reputable international financial hub.
Last November witnessed the debut of the Shanghai-Hong Kong Stock Connect programme, allowing Hong Kong residents to buy and sell shares in the domestic Chinese stock market, hitherto accessible only to mainland citizens, and a similar link to the Shenzhen bourse is expected to be under way. The integration, however, is two-way; the exchange linkage also allows mainland residents to trade shares listed in Hong Kong.
Lowering investment restrictions and broadening investment opportunities should ordinarily be welcomed by the financial community, but there are growing concerns in the industry about rising market volatility owing to increased mainland participation in the Hong Kong stock market.
In contrast to many developed countries, stock trading in China is dominated by retail investors rather than institutions and professional investors. A recent survey conducted by the Southwestern University of Finance and Economics (西南財經大學) revealed that more than two-thirds of investors joining the stock market frenzy this past year had not attained a high school education, with six percent being outright illiterate.
Fully aware of the risk of sounding elitist, one has to admit that a disproportionate fraction of novice and under-informed investors is not a healthy situation. These inexperienced hands are prone to impulsive trading based on sentiment or even hearsay, fueling “herding” effects and exacerbating contagion when volatility spikes.
With Hong Kong shares now within their reach, mainland investors’ bouts of irrational exuberance (spontaneous buying because of an auspicious ticker code?) and panic increases market risk for all participants. A widening Chinese footprint in the Hong Kong stock market is nothing new; Chinese companies already make up over 60 percent of the Hang Seng Index and have been at this level for years. Opening up the Hong Kong stock market to retail mainland investors, however, creates a disruptive negative externality that may ultimately have destabilizing effects.
In a mature capital market, prices of shares gravitate towards levels that equilibrate supply and demand, driven by investors rigorously researching their investments and analysing companies’ fundamentals. This “price discovery” role is greatly hampered when there are cadres of aunties and day-trading high school drop-outs from across the border punting their savings on penny stocks.
Crunching the numbers will reveal that, in terms of price volatility, mainland Chinese shares are currently among the riskiest in the world, second only to Greece, on par with Nigeria, Argentina, Venezuela, and Ukraine. Given the pace of mainland integration, Hong Kong won’t be far behind.