Did Hong Kong stocks hit bottom first?, Cancel stamp duty? Li Jiachao just spoke out: will study increasing stock market liquidity! Southward capital frenzy buying 200 billion yuan

Just now, there was heavyweight news in the Hong Kong stock market!

According to the official Weibo account of China Central Television's Greater Bay Area Voice, the Chief Executive of the Hong Kong Special Administrative Region, Li Jiachao, held his second policy address regional consultation meeting in Sha Tin, Hong Kong today to listen to the opinions and suggestions of the public. Li Jiachao stated that a group will be established by the Financial Secretary to study how to increase the liquidity of the stock market.

Not long ago, the Hong Kong Securities and Futures Association issued a statement calling for the revocation of stock stamp duty. The union stated that since the rumor of adding stock stamp duty began in 2020, the organizers have been paying attention to stock stamp duty. The union stated that the increase in stock stamp duty has severely impacted the trading volume and living space of local securities markets, and the securities industry is one of the four pillars of Hong Kong, affecting overall development. So, will increasing stock market liquidity start with the cancellation of stamp duty?

From the perspective of capital flow, although there are still signs of withdrawal from foreign investment, funds from the mainland's southbound Hong Kong stock market have continued to flow in the past two months. Since August, there has been an increase in buying efforts, with a net buying amount of up to HKD 61 billion and a net buying volume of over HKD 200 billion this year. Does this mean that the Hong Kong stock market will also be the first to bottom out?

Li Jiachao just spoke up

The Chief Executive of the Hong Kong Special Administrative Region, Li Jiachao, held his second Policy Address Regional Consultation Meeting in Sha Tin, Hong Kong today to listen to the opinions and suggestions of the public.

Li Jiachao stated that in his past interactions with citizens and discussions in consultation meetings, he felt that the citizens generally supported the policy guidelines and policies of the first policy address, hoping to "deepen and expand" and explore whether there are new areas and issues. He and his team attach great importance to this regional consultation meeting. Today, they attended the meeting with all 22 directors, including a family, to have face-to-face communication and exchange ideas with the citizens. They hope to speak less and listen more, and try to buy more time to listen to the opinions of the citizens.

The regional consultation will be divided into two parts. The first part is for citizens to express their opinions on different policy areas, while the second part is divided into four groups for citizens to directly communicate with officials. Li Jiachao will also visit various groups to listen to the opinions of citizens.

Li Jiachao stated that the SAR government will support the employment situation and lifestyle of disabled people, and also attach importance to encouraging economic activities, including conducting research on revitalizing the night economy. In terms of tourism, he pointed out that how to diversify development and make tourism more diverse and attractive, including adding some natural ecological and historical tourism routes, are all worth the reference of the SAR government.

Li Jiachao said, "We know that everyone is concerned about the stock and real estate markets, and we attach more importance to talent and manpower supply, especially in training local talents and retaining them to 'take root'. In addition, the application of technology is also very important. Technology should not only be applied in daily life, but also be used to ensure that citizens are not deceived." He also said that the Financial Secretary will form a group to study how to increase the liquidity of the stock market.

Will stamp duty be cancelled?

Li Jiachao will release a new Policy Address on October 25th and is currently receiving public consultation. The Hong Kong Securities and Futures Association has previously responded by requesting the revocation of stock stamp duty. The union stated that since the rumor of adding stock stamp duty began in 2020, the organizers have been paying attention to stock stamp duty. The union stated that the increase in stock stamp duty has severely impacted the trading volume and living space of local securities markets, and the securities industry is one of the four pillars of Hong Kong, affecting overall development.

Previously, Hong Kong, China raised the stock stamp duty rate to 0.13%, a 30% increase from the previous stamp duty rate. Data shows that in the 2020 fiscal year, stamp duty in Hong Kong, China accounted for approximately 10% of Hong Kong's overall tax revenue, with about half of it coming from stock trading stamp duty.

So, will Hong Kong abolish stamp duty? Analysts believe that since Li Jiachao has already spoken out, this plan should also be within the scope of discussion. However, the liquidity of Hong Kong stocks may not only be related to transaction costs, but exchange rates are also an important factor.

Due to the linked exchange rate system adopted by Hong Kong, China, when the Hong Kong dollar is weak, especially when it reaches the weak side guarantee level, it will passively cause the contraction of the asset size of the Monetary Authority's foreign exchange fund, that is, the contraction of liquidity. However, when the Hong Kong dollar is strong, especially when it reaches the strong side guarantee level, it will cause the expansion of the asset size of the Monetary Authority's foreign exchange fund, that is, the expansion of liquidity. Since March last year, the Federal Reserve has initiated a round of aggressive interest rate hikes. Although Hong Kong and the Federal Reserve's policy interest rates have remained in sync, there has still been a significant interest rate inversion between the Hong Kong dollar and the US dollar.

Due to the extremely high interest rate difference between the US dollar and the Hong Kong dollar, there is considerable arbitrage space in the foreign exchange market, which leads to the market selling Hong Kong dollars to buy US dollars, weakening the Hong Kong dollar, and continuous tightening of Hong Kong dollar liquidity. This is also an important reason why there is insufficient liquidity in the Hong Kong stock market. Therefore, whether to reform the linked exchange rate system of the Hong Kong dollar in the future is also worth paying attention to.

Will Hong Kong stocks hit bottom first?

It is worth mentioning that both Hong Kong and A-shares have been relatively weak recently, but Hong Kong stocks are significantly stronger than A-shares. So, will Hong Kong stocks hit bottom first?

From the perspective of capital flow, there is indeed such a possibility. Since August, northbound funds have continued to sell A-shares, but southbound funds have continued to buy Hong Kong stocks, with a net purchase amount exceeding HKD 61 billion. In July, the net purchase also reached HKD 15.8 billion, and this year the net purchase exceeded HKD 200 billion.

China International Capital Corporation (CICC) believes that against the backdrop of the A-share market once again under pressure and the continuous outflow of overseas funds, the Hong Kong stock market has unexpectedly shown stronger resilience. Considering its offshore market attributes, this performance is indeed not common. Although some investors may have doubts about this, this situation did not actually surprise us. We have repeatedly pointed out that there is downward protection for the Hang Seng Index around 18000 points, especially since last week when the market began to show a series of signs of bottoming out, such as low valuation levels and high short selling ratios.

The resilience and bottom support line reflected in the Hong Kong stock market have been tested multiple times this year, mainly due to: 1) absolute low valuations, allocation ratios, and investor sentiment. For example, the valuations of the Hang Seng Index and the State owned Enterprise Index are currently below 1 PB, and the 12 month dynamic P/E ratio of the MSCI China Index is also around 0.6 times the standard deviation below the historical mean. In terms of configuration, according to EPFR data, since the outflow of overseas funds in March 2021, foreign investment has significantly allocated less Hong Kong stocks. At the same time, the current lower valuation level has also attracted mainland investors. Last week, the Hong Kong stock market received a net inflow of southbound funds for five consecutive trading days, which is a good example; 2) More importantly, the continuous introduction of policies still has a bottom-up effect, such as the latest interest rate cut and the three departments promoting the implementation of the policy measures of "recognizing a house without recognizing a loan" for purchasing the first home.

According to data from Tianfeng Securities, as of August 18th, the 12 month forward PE of the Hang Seng Index has a 2.1 standard deviation from the median since 2013, which is about 1% of the historical percentile value since 2013; The Hang Seng Index has a 0.9 standard deviation discount from the median of the MSCI Global Index PE since 2013, which is 6% of the historical percentile; The equity risk premium of the Hang Seng Index is higher than the historical median by 0.5 standard deviation, at a historical percentile of 72%. The valuation of Hong Kong stocks is at a relatively low level, and the short-term market sentiment may be pessimistic. At the marginal level, southbound funds are clearly flowing in, and the potential return on current investments is relatively high. In the medium term, with the gradual realization of incremental value through the development of AI models by Hong Kong Stock Exchange Science and Technology Network companies, it is expected to continue to attract capital allocation.