Banking & Finance

The stability trade

How will the A-share market and Hang Seng Index perform in 2022?


The Hong Kong stock market was humming along in bullish mood in late 2020, following a 17% rebound in the Hang Seng Index (HSI) in the fourth quarter of the year. The rally was fuelled by hopes that more of the Chinese internet heavyweights would turn away from the US markets and go public on the Hong Kong bourse, despite the unfortunate experience of Ant Group, which had been forced by the government to postpone what would have been the world’s biggest ever IPO in November that year.

The benchmark index ended 2020 at 27,273 and strategists at most of the investment banks were predicting that the HSI could top 30,000 by the end of 2021 (it did touch that threshold briefly in February).

However, Hong Kong ended last year as one of the worst performing markets in the world, with a 14% slide over the full 12 months. The main dampener: Chinese internet stocks. Some had been included in key indices such as the HSI at toppish prices but Beijing’s sudden regulatory crackdown on the sector throughout 2021 took much of the steam out of Hong Kong’s bourse.

Take Alibaba Health Infotech. Alibaba’s internet healthcare firm was trading at around HK$30 a share in March last year when it became a member of the blue chip HSI. It has since slumped nearly 80% to HK$6 with a market value of HK$80 billion ($10.2 billion).

No wonder analysts have been paying more attention to regulatory risks relating to Chinese stocks.

The most important political event in China in 2022, of course, is the five-yearly Party Congress that elects the new crop of leaders for the Communist Party (CPC). Some senior decisionmakers will retire in the current cycle, although Xi Jinping isn’t expected to be part of the departing group. Instead he will most likely extend his 10-year stint atop China’s political pyramid.

The 20th Party Congress will take place ‘around’ October and most analysts are taking the dutiful line that ‘stability’ will be the overriding focus during an ‘election year’.

The country will maintain “a stable and healthy economic environment” ahead of the Congress, according to a statement published in late December by Xinhua (synchronised to come out after the two-day Central Economic Work Conference, an agenda-setting meeting held by China’s senior economic planners, at the end of each year).

“Next year’s economic work should prioritise stability and all regions and departments should shoulder the responsibility of stabilising the macroeconomy,” Xinhua confirmed last month.

The good news for shareholders is that the country’s internet regulators and antitrust agency might see that as a steer to take a breather from further measures that could rattle the financial markets. “Beijing will also likely slow the pace of regulations to mitigate the negative impact on growth,” Qu Hongbin, HSBC’s chief China economist, wrote in a recent research note, adding that the central government is likely to increase spending on technology and allow local governments to borrow more to bolster investments in ‘new’ infrastructure like 5G.

Most domestic brokerages have also been suggesting that Beijing will step up monetary and fiscal easing to shore up a slowing economy. This explains some of the underlying strength in the A-share market, perhaps, with the Shanghai Composite climbing nearly 5% in 2021. Citic Securities noted that the benchmark index has ended up higher for three consecutive years – the first time that’s happened in nearly three decades.

It is relatively rare for the A-share market to outperform Hong Kong’s benchmark. The reasons why it did so on this occasion were simply because Hong Kong carries a much heavier weighting towards the afore-mentioned internet and tech stocks that were hardest hit by Beijing’s antitrust policy drive.

However, the Financial Times points to another indicator that looks a lot less bullish for the Chinese economy this year – and by extension, perhaps for the A-share market. The newspaper notes that Chinese banks met their state-imposed lending quotas last month by purchasing low-risk bankers’ acceptances rather than make new loans on concerns they might go bad. The FT quoted analysts as saying this “reflected financial institutions’ wariness about the country’s slowing economy”.

If you are looking for a bearish indicator, there is one to ponder…

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