Photographer: Billy H.C. Kwok/Bloomberg

For Hong Kong Investors, the New Year Brings a Familiar Quandary

  • Volatility in ETF tracking Hong Kong stocks at four-month high
  • Dual-listed equities declined average 2% in U.S. during break

Traders in Hong Kong returning to work Thursday after Lunar New Year celebrations are facing the same predicament that has dogged them for the past 12 months: slumping equities and wild price swings.

Shares of 23 Chinese stocks listed in both Hong Kong and the U.S., including oil producer PetroChina Ltd. and technology company Tencent Holdings Ltd., have fallen an average 2.6 percent in New York since Hong Kong markets were closed for the holiday on Friday. While a rally Wednesday cut this week’s decline in the largest ETF tracking Hong Kong-traded stocks to about 2 percent, volatility remained around the highest level since October.

A global rally fizzled on Wednesday as renewed concern about the strength of the U.S. economy offset earlier gains after Federal Reserve Chair Janet Yellen signaled she may delay raising interest rates. Equities had slumped for the prior two days amid speculation that European banks may have to write down assets, exacerbating concern that global growth is faltering as China’s economic slowdown deepens and commodities sell around the lowest prices since 1991. A bloody Hong Kong street riot Tuesday, the biggest outbreak of violence in the city since the 2014 pro-democracy uprising, also underscored political risk in the local market.

“The general tone of other markets has been quite soft,” said Tony Hann, who helps oversee about $270 million as head of equities at Blackfriars Asset Management in London. “It’s difficult to be optimistic” about Hong Kong, he said.

American depositary receipts of PetroChina Co., the nation’s largest oil producer, rose 0.6 percent to $56.77 Wednesday in New York, reducing the losses this week to 4.2 percent. Tencent gained 1.4 percent in over-the-counter trading to $17.49, paring its drop since Friday to 3 percent.

The $4.3 billion iShares China Large-Cap ETF, which tracks Chinese companies in Hong Kong, rose 0.7 percent to $29.07, reducing the decline since Friday to 2.2 percent. It traded at 5.1 percent below the value of its assets on Tuesday, the biggest discount since 2011. Thirty-day historical volatility was 34 percent. The iShares MSCI Hong Kong ETF has fallen 1.8 percent so far this week.

Global markets buckled earlier this week, erasing more than $1 trillion in equity valuation, after Deutsche Bank AG sparked concern that European bank creditworthiness was weakening as oil’s rout took crude below $28 a barrel. Testifying before Congress Wednesday, Yellen suggested that the Fed still expects to raise interest rates gradually if the market turmoil eases. Her remarks came after Germany’s biggest bank said it is considering a bond buyback.

‘Not Disastrous’

The almost 7 percent loss in Japan’s Nikkei 225 benchmark, a barometer for Asian markets, over the past three days suggests the Hong Kong market may fall further to catch up with its peers, said Ankur Patel, chief investment officer at R-Squared Macro Management. The uncertainty about China’s currency policy is also weighing on investors’ sentiment, he said by phone interview from Birmingham, Alabama.

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Brendan Ahern, a managing director at Krane Fund Advisors, said trading in ETFs indicates “a lower, but not disastrous opening” in Hong Kong. “Weakness in Japan will likely spill over, though the pricing of Hong Kong securities shows modest declines,” he said in an e-mail.

Hong Kong’s Hang Seng Index has dropped 22 percent over the past year as the city’s economy was beset by both slower growth in China and rising U.S. interest rates. A 5.6 percent decline in the yuan over the past six months is also fueling speculation that the country may abandon its 32-year-old currency peg to the dollar.

Street Riot

Social tension is flaring locally. Police fired warning shots in Kowloon’s Mong Kok district Tuesday after an effort by food and hygiene officials to clear illegal food stalls morphed into a riot and resulted in injuries and arrests. It was the most violent since the “Umbrella Movement” of 2014, when protesters paralyzed downtown Hong Kong for more than two months to demand the right to pick the city’s leader.

“The Hong Kong riot in and of itself is maybe not such a horrible thing, but it does serve as a reminder of what kind of political problems can arise if growth can’t be maintained,” said Joe Gubler, who oversees about $2.3 billion at Causeway Capital Management in Los Angeles. “Hong Kong markets have some catching up to do, compared to what developed markets have done while they were closed.”

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