China’s Hamstrung Hong Kong Hankering
Chinese stocks yawned in unchanged position for the year as the 15th anniversary of Hong Kong’s absorption was marked with a new chief executive close to Beijing, and mixed messages on dollar peg and offshore financial center direction. Incoming enclave leader Leung proclaimed a “proactive departure” which property and services firms interpret as likely higher taxes and state control. The shift comes as IPO activity was a meager $3 billion in the first half, one-tenth the 2011 sum as numerous deals were pulled or reworked to find critical cornerstone investors. Post-listing prices continue to plummet and stricter underwriter obligations involving potential criminal penalties are in force after prospectus frauds were uncovered by regulators. The exchange lagged Kuala Lumpur and Shanghai offerings for the period as the mainland unveiled an experimental blueprint for its own “mini-Hong Kong” in Shenzhen’s Qianhai sub-division. The zone would take shape from 2015-2020 as a free capital and currency trading hub which could presage broader exchange rate and portfolio flow liberalization. A previous framework authorizing pilot yuan convertibility in the city of Tianjin was overwhelmed by post-2008 crisis considerations, and the central bank has reiterated a mid-decade deadline for “basic” opening. With these future changes the former head of the HK Monetary Authority recently urged reconsideration of the 30-year old dollar peg, with allies recommending a switch to a basket including the renimbi, but Financial Secretary Tsang upheld the status quo. However the de-facto central bank announced a Chinese currency backstop facility in view of interbank liquidity strains in recent months especially with quieting of the bond “dim sum” market. According to fund trackers investors took money put of both debt and equity the past quarter as the BRICS cohort experienced outflows. In the US aversion is magnified in an election year as the bilateral trade surplus reverted to its historic norm and the Obama Administration filed a WTO complaint against car-import practices. Beijing faces an array of anti-protectionist actions in renewable energy, rare earths, and indigenous innovation requiring local technology transfer. On financial services it agreed to additional joint venture brokerage ownership in the last round of the Strategic and Economic Dialogue with Washington, and foreign hedge funds in July got permission to selectively solicit Chinese clients.
The breakthroughs occurred as outgoing Premier Wen “intensified the response” to acknowledged GDP tapering with public investment increases and interest rate cuts, while keeping commercial and residential property curbs intact. With food cost retreat inflation is at a 3-year 2 percent low, with reduced corporate pricing power reflected in anemic earnings inviting deflation talk. Reported PMIs have teetered at the critical 50 threshold, although many local governments have circumvented real estate restrictions with their own promotions as a national social housing push to build 35 million more units over the next 5-year plan may keep the edifice from crumbling.
