Hong Kong’s stock market needs more than just verbal assurances for a sustainable rally, say analysts

  • Analysts are concerned that China may not be able to achieve 5.5 per cent GDP target
  • Geopolitical risks and delisting fears of US-listed Chinese stocks weigh on investor anxiety

With the phenomenal two-day rally in Hong Kong stocks fizzling out on Friday, analysts said the market needs more than just verbal boosts for the rout to end.

A rare assurance by Chinese Vice-Premier Liu He on Wednesday that Beijing would “maintain stable operation of the capital market” pushed up stocks by the most since 2008, helping blue-chip companies in Hong Kong to recover US$468 billion of market value in two days. But for a lasting recovery, investors said several challenges stand in the way.

The biggest worry is the weakness in China’s economy, said William Fong, head of Hong Kong and China equities at global investment firm Barings. “There is concern about whether China can really achieve its 5.5 per cent GDP target, given high commodity costs and shortages in shipping and components,” he said.

China set an economic growth target of around 5.5 per cent for this year, in its annual parliamentary meeting earlier this month, but many economists expect lower growth. Goldman Sachs has forecast 4.5 per cent growth this year.

Geopolitical risks and delisting fears of US-listed Chinese stocks are weighing on investor anxiety, adding to concerns about China’s economic growth amid a flare-up in Covid-19 cases on the mainland, which last week surged to their highest level since 2020.

Similar assurances by Chinese policymakers in the past have “put a floor on the market rather than set off a sustainable rally,” said Rory Green, chief China economist at research firm TS Lombard.

“Even with a clearer mission statement, the twin drags of Covid-19 and the property sector – not to mention the growing external risks – make achieving plus 5 per cent growth in 2022 a very difficult task,” he said in a note published on Thursday.

Gerwin Bell, Asia lead economist at global asset manager PGIM Fixed Income, said that China’s rosy GDP growth target comes against a backdrop of a sharp slowdown in real estate.

“Export growth is likely to decelerate as global growth slows amid the rapid withdrawal of monetary and fiscal stimulus expected worldwide, not to mention risks from the recent geopolitical stress and surge in commodity prices,” he said in a note on Wednesday.

Other market pressures that triggered the brutal sell-off, including the delisting concerns of Chinese American depositary receipts (ADRs) and possible US sanctions on China for its ties with Russia, have eased slightly.

The State Council said Chinese and US regulators had “made good progress” and were working on concrete solutions.

“This is the most official and positive statement the Chinese government has made on this issue and indicates China is willing to resolve the issues to avoid delisting of all Chinese ADRs,” said Edison Lee, equity analyst at Jefferies, in a report published on Wednesday.

The war in Ukraine “could accelerate a deal” between the US and China’s securities watchdog as Beijing seeks to avoid the economic and social fallout should it suffer the same sanctions that Russia did, added Lee.

While it remains to be seen if Liu’s comments would be a “game-changer”, BNP Paribas Asset Management remains upbeat on Chinese equities this year.

“Volatilities are unlikely to change the longer-term economic recovery trends,” said Jessica Tea, Greater China investment specialist at the French bank. “The government still has fiscal and monetary ammunition for further selective stimulus and put the focus on stabilising the economy as its key priority for 2022.”

Author: Cheryl Heng, SCMP

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