China Crisis; Hong Kong Shares Enter Bear Market; A Heavy Loss

The ripples of the crisis emanating from China’s real estate sector, the world’s second largest economy, are also affecting the Hong Kong stock market. The Hong Kong market was also in the grip of bears, with the main stock index closing 21 percent below recent highs on Friday. The crisis that has erupted in China’s real estate sector is likely to affect the wider economy as well.

Most of the constituents of the Hang Seng, the main index of the Hong Kong Stock Exchange, are shares of companies operating in China. So the impact of any setback in the Chinese economy will be reflected in these stocks as well. Due to the extremely strict lockdown restrictions that lasted for three years in the wake of the Covid pandemic, there was a decline in foreign investment. Consumer spending is also low. This also adversely affected China’s housing market.

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Bear market

A bear market is considered to have entered a bear market when the share price has fallen more than 20 percent below its recent highs. It is also a symptom of a relatively uncommon situation that raises serious pessimism about the country’s economy. The Hang Seng index fell 2 percent on Friday. It also recorded a loss of six percent in the previous trading week. The Hang Seng has fallen more than 10 percent so far in August.

A faltering economy

In addition to the distress caused by rising inflation and high interest rates in Europe and the United States, worries about the faltering Chinese economy have gripped global investors. Most European stocks fell on Friday. The leading US index S&P 500 closed little changed. It is also worth noting that the yield on US bonds faced a correction on Friday, but the previous day it had recorded the highest level since 2007.

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The real estate crisis

The source of China’s current crisis lies in the real estate sector. Last Thursday, China’s largest real estate company, Evergrande, filed for bankruptcy in a US court. The move came as it was left with no other way to pay back hundreds of billions of dollars in debt to foreign investors.

Following this, another realty giant, Country Garden, is also reported to be in trouble. Country Garden shares are currently priced at less than 1 Hong Kong dollar (US$0.13). Similarly, China-based and Hong Kong-listed Soho China reported a 90% drop in net profit. Market experts point out that although the Chinese market has been freed from the severe Covid restrictions that existed for a long time, the confidence of the Chinese market has not yet returned.