9th December 2023 – (Hong Kong) The Hong Kong financial industry is experiencing a historic downturn as the city’s US$4.6 trillion stock market undergoes a prolonged slump, leading to the closure of numerous brokerages and Wall Street banks laying off dealmakers due to a sharp decline in initial public offerings.
The Hang Seng Index, on course for a fourth successive year of declines, has reached a one-year low, while average daily turnover has decreased by 14 per cent compared to the five-year average. Additionally, the IPO market is facing its worst year since 2001, reflecting a challenging environment for the city’s financial sector.
The extended market downturn and the resultant job losses are raising concerns about the future of Hong Kong’s position as Asia’s top international finance centre, exacerbated by the city’s stringent pandemic measures and Beijing’s imposition of national security legislation.
The continued wave of shutdowns and layoffs at brokerages is considered one of the most severe in recent memory, reflecting the challenges facing the market.
Small- and medium-sized brokerages, mainly reliant on trading commissions and margin businesses for revenue, have been significantly impacted by the market downturn. A survey of local brokers by the Hong Kong Securities Association revealed that over 72 per cent suffered losses last year, with at least a quarter planning to scale down their operations this year.
The market’s struggles have also led to wider bid-ask spreads for Hong Kong stocks in Asia Pacific markets, resulting in increased trading costs for institutional investors. Tony Cheung, an execution consulting specialist at Instinet, highlighted the impact of these widened spreads on institutional investors.
Despite initial projections for a recovery in Chinese shares following the end of Covid-19 restrictions, investor sentiment has remained persistently downbeat.
The lack of liquidity in the market is evident, reflecting declining institutional interest, with global investors divesting a substantial portion of their Hong Kong holdings over the last two years. The challenges have led to the worst year for Hong Kong debuts since 2001, with only US$5.1 billion of IPOs, a stark contrast to the US$52 billion raised just three years ago.
The decision by Alibaba Group Holding Ltd. to terminate plans to spin off and list its US$11 billion cloud business, along with the suspension of a listing for the popular grocery business Freshippo, has contributed to the sense of instability in the market.
Given the ongoing market challenges, Wall Street banks have conducted multiple rounds of layoffs in Hong Kong, with UBS Group AG cutting about two dozen investment bankers in Asia, mainly China-focused roles based in Hong Kong.
The market’s extended downturn, especially within a year when global equity markets have gained, has led to a decline in Hong Kong’s financial status. The city’s stock market is now significantly smaller than Japan’s, and there is the risk of being displaced by India, highlighting a potential shift in the global financial landscape.
The Hong Kong government has taken steps to address the downturn, including reversing a stamp duty hike on stock trades, and plans to ensure markets stay open during severe weather. However, challenges related to high borrowing costs and the weakness in mainland China’s economy continue to persist, leading experts to emphasize the need for a broader policy shift to revive the market.