Hong Kong’s mysterious sell-offs

The dramatic share price falls of some Hong Kong-listed companies left analysts scratching their heads.

744-HK-634

Hong Kong's standards are slipping

"Now that is some proper value destruction," says Deutsche Bank's Michael Lermer. Last Wednesday, shares in Hanergy Thin Film Power, the world's biggest solar power equipment maker by market value, slumped by 47% for no apparent reason. A day later, the two main business units of a horse breeding, wine and finance conglomerate, Goldin Financial and Goldin Properties, both fell by around 40%. Shareholders in the three companies lost a joint $36bn.

This is the equivalent of both Yahoo and American Airlines halving in value, says Peter Thal Larsen on breakingviews.com. These mysterious blow-ups "are testing Hong Kong at a crucial point". It has just opened a link allowing foreign investor to buy shares in Shanghai, and another to mainland China, through Shenzhen, is set to go live soon. But "to lure wary foreign investors", it will need to show it "can enforce value of openness and integrity". These wild swings suggest "standards are slipping".

Not necessarily, says Lex in the Financial Times. There have always been companies on the Hong Kong market that have provided "an outlet for people's gambling instincts", notes David Webb, a corporate governance activist in Hong Kong. These were precisely those sorts of companies operating in exotic sectors and with most of the shares closely held by their owners.

What does seem clear, however, says Danny Fortson in The Sunday Times, is that the new connection to mainland China created an influx of Chinese retail investors that "supercharged the shares of previously anonymous companies". The link opened in mid-November. By early last week, both Hanergy and Goldin had surged.

But investors fretting about Asia should remember that Western markets "have implosions too", notes Lermer. "Witness US artisan marketplace Etsy's 20% crash after its results, or Google's $20bn slide in 2012 after a disappointing earnings statement". This is also a warning for passive investors, notes Randall Foryth in Barron's.

Hanergy had become the biggest holding in a US-listed solar energy-focused exchange-traded fund, which lost 9% last week. The bigger a stock gets, the greater its weight in an index. "Such is the danger of simple-minded, mechanical index investing."

One reflection of the subdued global recovery since the financial crisis has been the lacklustre performance of Asian exports. Exports from north-east Asia are particularly closely watched, notes The Economist, as these reflect Japan's high-tech expertise, Korean and Taiwanese electronics, and China's assembly skills. This "juggernaut", accounting for 25% of world exports, has slowed to a crawl. In April, for example, Korean exports were down 8% year-on-year; China's, 6.4%.

But this doesn't suggest the global economy is about to plunge off a cliff. The link between north-east Asian exports and world growth has started to weaken, says The Economist, with the former trailing US GDP in the past three years. This is due to a structural shift in regional trade.

In the first decade of this century, as China joined the World Trade Organisation, companies moved their Asian supply chains there. China would tend to import parts and put them together for re-export. But now that China is making more sophisticated goods, it is less reliant on imported parts.

As the share of intermediate parts in China's imports falls by 11% since 2007, says Royal Bank of Scotland less intra-Asian trade is needed to produce the same final goods. Along with the commodities decline and a structural slowdown in both China and the developed world, this is another reason not to expect Asian export growth to return to the levels seen before the crisis.

Recommended

Emerging markets fall behind their developed-world counterparts
Emerging markets

Emerging markets fall behind their developed-world counterparts

While developed-world markets look forward to a recovery, emerging market stocks have tumbled as foreign investors pull out cash.
16 Apr 2021
Four of the best investment trusts for investing in emerging markets
Investment trusts

Four of the best investment trusts for investing in emerging markets

Investors need to tread very carefully in this risky sector. Here are the best ways to approach it
22 Mar 2021
Storm brews in emerging markets as investors pull cash out
Emerging markets

Storm brews in emerging markets as investors pull cash out

Foreign investors have begun to pull cash out of emerging markets as they begin to look less attractive when compared to the rising return from holdin…
12 Mar 2021
Stockmarkets shrug off turbulence
Stockmarkets

Stockmarkets shrug off turbulence

Stockmarkets have hit their first bout of turbulence of the year, but most are clinging onto January’s gains.
4 Feb 2021

Most Popular

“Joke” cryptocurrency dogecoin goes to the moon. What’s going on?
Bitcoin

“Joke” cryptocurrency dogecoin goes to the moon. What’s going on?

Dogecoin – a cryptocurrency created as a joke – has risen by more than 9,000% this year alone. Saloni Sardana looks at how something that began as an …
19 Apr 2021
The FTSE 100 has clawed back above 7,000 – how much higher can it go?
UK stockmarkets

The FTSE 100 has clawed back above 7,000 – how much higher can it go?

The FTSE 100 index has risen to over 7,000 for the first time in over a year – it now sits just above where it was in 1999. But its era of neglect cou…
19 Apr 2021
The bitcoin bubble will burst: here’s how to play it
Bitcoin

The bitcoin bubble will burst: here’s how to play it

The cryptocurrency’s price has soared far beyond its fundamentals, says Matthew Partridge. Here, he looks at how to short bitcoin.
12 Apr 2021