The historic decline of the Hong Kong Stock Exchange has closed dozens of brokerage houses

A historic drop of $4.6 trillion in the capitalization of the Hong Kong Stock Exchange is being felt in the city's financial industry, according to a Bloomberg analysis, which shows that 30 local brokerage houses have closed this year after a record of 49 houses closed in 2022.

According to the source, Hong Kong's Hang Seng index is in its fourth year of declines, the longest losing streak in the history of the index, which last week hit a one-year low. Average daily turnover on the Hong Kong Stock Exchange is down 14% compared to the five-year average, and the initial public offering (IPO) market is in its worst year since 2001.

The prolonged crisis and job losses among brokerage houses raise questions about the future of the city's position as Asia's leading international financial center. It was affected by the extreme restrictions imposed in Hong Kong due to the pandemic, but also by Beijing's implementation of national security legislation.

"This wave of closings and layoffs affecting brokerage houses is the most severe we've ever seen," Edmond Hui, chief executive of brokerage firm Bright Smart Securities in Hong Kong, claims, quoted by Bloomberg, stating: " The key is to improve market liquidity. Now everyone has problems. I just don't see a light at the end of the tunnel."

• Small and medium-sized brokerage firms, the most affected

Small and medium-sized brokerage firms, whose income comes mainly from trading commissions and margin trading, are bearing the brunt of the market downturn. According to a survey by the Hong Kong Securities Association earlier this year, among local brokers, more than 72% suffered losses last year, with at least a quarter planning to scale back their operations this year.

Hong Kong stocks have the highest bid-ask spreads - the difference in price between offers to buy and sell shares - in Asia Pacific markets, according to Tony Cheung, a consultant at Instinet. "This means increased transaction costs for institutional investors," Cheung pointed out.

Despite the forecasts made by analysts at the beginning of the year, according to which Chinese shares will recover after the country has put an end to "Covid Zero" restrictions, investor sentiment has become constantly unfavorable, notes Bloomberg.

A struggling economy, weak consumption, strained ties between the US and China, and the real estate crisis have caused foreign funds to exit the markets.

"The lack of liquidity shows that institutional interest in Hong Kong and China is falling to a new low," said Qi Wang, chief investment officer at asset manager UOB Kay Hian, adding: "Global investors have shed much of their holdings from Hong Kong for the past two years. Many now consider China "irrelevant" from the perspective of the global portfolio".

• 2023 - worst year since 2001 for Hong Kong IPOs

The lack of deals adds to the negative sentiment regarding Hong Kong's struggling market, according to Bloomberg. According to the cited analysis, this year is on track to be the worst for Hong Kong debuts since 2001 (after the dotcom bubble burst), with $5.1 billion in IPOs. The amount is very small compared to the 52 billion dollars raised through the IPO three years ago, and down 84% from the average of the last ten years, of 31 billion dollars.

Just last month, Alibaba Group Holding Ltd. shocked investors by abandoning plans to spin off and list its cloud business, valued at $11 billion. The company, which cited US restrictions on chip sales to China as the reason for dropping it, said it was also suspending the listing of popular grocery business Freshippo.

• Wall Street banks are making layoffs in Hong Kong

In this context, investment banks are reducing their size. Over the past year, Wall Street banks, including Goldman Sachs Group Inc. and Morgan Stanley, carried out several rounds of layoffs in Hong Kong.

In October, Bloomberg News wrote that Switzerland's UBS Group AG has let go of dozens of investment bankers in Asia (based in Hong Kong), mainly in China-focused roles.

"This 2023 market is probably the toughest job market since the global financial crisis," says John Mullally, managing director of Hong Kong-based recruitment firm Robert Walters, referring to the local financial services industry. "I think there will be even more job cuts in 2024," concludes Mullally.

The continued decline, especially in a year when global equity markets have soared, puts Hong Kong at a strong disadvantage. According to Bloomberg, Japan's stock market is now $1.5 trillion larger than Hong Kong's, the largest gap since 2009. Japan's Topix index is up 23% this year, compared to the 17% decline in the Hang Seng Index. Hong Kong is also at risk of being overtaken by the Indian market, which is only $518 billion smaller.

• Chi Lo, BNP Paribas Asset Management: "US monetary policy must move from tightening to easing"

The Hong Kong government has taken measures to stop the recession and stimulate transactions. These include canceling a stamp duty increase on share transactions introduced in 2021, as well as plans to ensure markets remain open during severe weather (typhoons, for example).

However, local officials cannot do anything about high borrowing costs in the context of tightening US monetary policy.

"The stamp duty cut is just a cosmetic," said Chi Lo, Asia Pacific investment strategist at BNP Paribas Asset Management, adding: "To revive the Hong Kong stock market, US monetary policy needs to move from tightening to easing, and Beijing needs to introduce more aggressive easing."

In the context presented, Vivian Lin Thurston, portfolio manager at William Blair Investment Management, concludes: "The duration and severity of this cyclical market downturn in Hong Kong could continue to influence its status as a global financial center. Only if and when macro conditions and corporate fundamentals start to improve, could we see improved performance and increased liquidity in Hong Kong."

Hong Kong's Hang Seng Index fell 0.8% to 16,201.49 points yesterday.