🔒 Hong Kong in choppy waters, bracing for a repeat of 1998 Asia Financial Crisis

In the face of a deepening Hang Seng Index selloff, Hong Kong’s finance industry braces for a crisis reminiscent of the 1998 Asia Financial Crisis. Unlike the resilience shown after Lehman Brothers’ collapse, Hong Kong’s current vulnerability is tied to China’s economic woes. As the Hang Seng slumps over 10% in January, fears grow that publicly listed equities may be devalued to zero. With China’s mounting debt concerns, investors question the government’s will and ability to address economic challenges. Hong Kong’s financial viability hangs in the balance, echoing unsettling parallels with the past.

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By Shuli Ren

A year ago, Hong Kong’s finance industry was hoping that a China reopening would unleash pent-up consumer demand and bring deals and prosperity to the city. There is no such illusion left. 


As the Hang Seng Index selloff deepens, bankers and traders are preparing for the worst. This does not feel like 2008 when the Global Financial Crisis hit but 1998 — in the midst of the Asia Financial Crisis — a few people who have been around long enough lamented to me recently. The late 1990s crisis started with Thailand. But if another one erupts, China will be its root cause, and Hong Kong the epicenter. 

After the collapse of Lehman Brothers Holdings Inc., Hong Kong was relatively shielded by a rising Chinese economy. The finance industry lost only 7.7% of its workforce, faring much better than a decade earlier, when job losses amounted to over 13%, according to census data. Between August 1997 and 1998, the city’s blue-chip index lost as much as 60% of its value. 

These days, China turns out more doom than boon. January is not over yet, and the Hang Seng Index already has slumped by over 10%, making it the worst-performing among major global indexes. Even news reports that Chinese authorities are mulling to mobilize 2 trillion yuan ($278 billion) to stabilize the market gave the Hang Seng only a 2.6% bump on Tuesday. Hong Kong is the gateway to China. Mainland companies account for more than two-thirds of the bourse’s market cap.

While traders have pointed fingers at technical factors such as liquidation of structured products, some savvy investors fear factors more sinister are at play. It is possible that publicly listed equity is getting slowly written down to zero as investor concerns over China’s debt linger. After all, what is the value of a stock if creditors start knocking on the door?

This is plausible. Alternative assets are already being repriced. BlackRock Inc., which manages over $10 trillion worldwide, is seeking to sell an office complex in Shanghai at a 30% discount to its 2018 purchase price. Meanwhile, secondary buyers for private equity assets are demanding 30% to 60% discounts, versus 15% haircuts in the US and Europe. 

When it comes to debt, Beijing has to simultaneously tackle two potential blowups, one arising from leverage accrued in residential real estate, and the other from local governments’ borrowings. As of November, China’s non-financial sector debt reached 294% of gross domestic product, from about 160% a decade earlier. 

In credit research, there is will and ability to repay. Evidence is mounting that this government possesses neither. In mid-December, Beijing spelled out its grand plans for 2024, prioritizing industrial upgrades over boosting domestic consumption. It was a hands-off attitude toward a troubled housing market that is showing renewed signs of sales slump. 

And then there is the ability. Indebted local governments can refinance better if the cost of borrowing comes down. Even here, Beijing has hit a wall. 

The People’s Bank of China’s interest-rate cuts in the last two years have put its banks in the danger zone. As of September, lenders’ net interest margin stood at 1.73%, shy of the 1.8% level the government deems as necessary for their financial health. 

In mid-January, the PBOC didn’t cut its benchmark lending rate, to the surprise and dismay of some analysts. They shouldn’t have been shocked. It was PBOC’s tacit acknowledgement that its hands are tied. Hong Kong-listed Industrial & Commercial Bank of China Ltd. is trading at only 0.36 times book. It is a reflection of investors’ deep skepticism of its asset quality and earnings outlook. 

As a small open economy, Hong Kong is vulnerable to financial contagion and capital flights. Since 2009, hot money has flown in to be closer to China, just as it did in the 1990s en route to Southeast Asia. People nowadays question the city’s viability as a financial center, reminiscent of the prevailing sentiment in the aftermath of the 1997 handover. 

Even some of China’s policymaking sounds eerily similar. Bureaucrats are reportedly considering special bond issues for the fourth time; the first such issuance was in 1998 when China capitalized big banks to offset losses from non-performing loans. These are all uncomfortable parallels for a city that believes in fengshui and the inevitability of fate. 

We can only hope that policymakers in Beijing are watching and paying attention to the pervasive pessimism that is enveloping the city. Considering and mulling are not enough. Only forceful policy measures can stabilize this market. 

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