20th July, 2014
Why CCP is Afraid of Occupy Central: Answer is in HK’s Financial Data
Chinese Communist Party is very similar to extreme capitalism as it worships “commercialism”, hence Hong Kong’s “Central-values” naturally matches China’s “Soviet Socialism”.
Hong Kong’s Monetary Authority’s recent “gentle reminder” essentially said that “China is the largest risk to Hong Kong’s financial stability”.
The chart on the left is Hong Kong’s mortgage delinquency ratio in past years, and the chart on the right is the loans for the purchase of residential properties in Hong Kong (green line) and the black line is banking sector’s exposure to China’s non-bank borrowers.
South China Morning Post quoted an announced made by Norman Chan Tak-lam, Chief Executive of Hong Kong Monetary Authority, that the banking sector’s exposure to non-bank borrowers in China has skyrocketed from less than 10% of total loans in 2006 to 56% at present. In terms of loans to Hongkongers for purchasing residential units fell from 30% in 2006 to around 14% recently.
In other words, the money Hongkongers put in local banks is used for providing loan to China’s non-financial institutions (China’s government does not have responsibility for these loans nor bear any risks). This “Central Value” of Hong Kong is more important to China than to any ordinary Hongkongers: this highlights the symbiotic relations between CCP and “Central Value”. These data can be confirmed by multiple official sources.
Occupy Central has a direct impact on CCP’s wallet!
Perhaps most Hongkongers cannot afford to buy their own homes in Hong Kong, but the delinquency ratio of mortgage the banks in Hong Kong offer to Hongkongers is close to 0% – almost no Hongkongers who get mortgage will become bad debt to the banks locally.
How about the loan that goes to China? Let’s look at the Monetary Authority’s announcement:
Based on the data above, Hong Kong incorporated banks and foreign bank branches in Hong Kong account for 57% of the total China related loans, and trade finance loans accounted for HK$313 billion, which is 14% of the total Hong Kong banking sector’s loans.
From the chart below, it is clear that almost 50% of the non-financial institution borrowers are China’s State-Own-Enterprises:
What does the data above mean to Hong Kong? Although the Monetary Authority reported these numbers as everything is rosy – business as usual, the core of “Central Values”, but International Monetary Fund does not think the same.
According to another news report published on 19/July this year, loan to mainland entities (or China risk) comprises 19% of Hong Kong’s banking sector’s total assets. The IMF has warned of Hong Kong banks’ rising exposure to China debt, and many rating agencies have pointed out that “China risk” will lower Hong Kong’s sovereign rating.
In fact, these warnings only mentioned the risk of “direct loans”, which does not include China loans that were applied via other organisations and individuals in China. This means that Hong Kong has essentially become CCP’s “cash machine”. China’s economic success benefits Hong Kong? Not what the data says. Individual Visit Scheme brings only small contribution to Hong Kong’s economy when you compare it with the number above.
Now, let’s look at the Hong Kong Stock Exchange’s data.
The HKEx’s data shows that as of end of June 2014, Red-Chips and H-shares account for 40% of Hong Kong’s exchange’s total market capitalisation. Ten years ago, the percentage was around 28%.
This statistics, however, only include Red-Chips and H-shares, which are mainly SOEs, and exclude Hong Kong listed private companies (as opposed to SOEs) with core businesses in China.
Besides being China’s cash machine, Hong Kong is also the major stock exchange for Chinese companies to raise funds – the relationship between Hong Kong and China is so very close that anything happens to Hong Kong’s financial stability could bring catastrophic consequences to Chinese companies.
Was it true that China pumped money to save Hong Kong? This has to be true because all young Chinese drum on about all the time, plus China’s government says the same all these years. however, this is not backed by data either. On the contrary, the evidences seem to point at the opposite: Hong Kong’s saving China.
Again, not written by any random commentator, but the Hong Kong Stock Exchange – you can see the Cash Market Transaction Survey published in February 2014.
It details the distribution of cash market trading value by investor type – source of cash:
Hong Kong local retail investors accounted for 34% in 2003, but the percentage dropped to 18% in 2013, a rather small amount. Local retail investors is no better, standing at around 20%. EP principal trading went up to 16% from single digit 10 years ago. Overseas retail investors had always been no more than 5%.
The significant change is the overseas institutional investors which went up from 33% to 40%.
However, Chinese investors do not account must of these overseas institutional investors:
The key overseas institutional investors had always been the UK and the US, accounting for around 54% of Hong Kong’s total overseas institutional investment. Investments coming from China, although saw significant increase, only accounted for 11% (up from 7% in 2003). The significance is because of the low base.
The statistics above show that Hong Kong’s stock market is just like its banking system, a cash machine to Chinese companies.
There is a major problem with this cash machine – it is not under the control of China’s government. Why? Overseas investors are certainly interested in the China theme, but they would not only invest with the endorsement of Hong Kong’s quality control system. Chinese companies, therefore, are only qualified to have reached the “international standard” if they can list on the Hong Kong Stock Exchange.
For the same reason for Citic Group, a HK$280 billion worth mega Chinese state-owned key enterprise, decided to float on Hong Kong Stock Exchange and took over its parent company, instead of listing its international assets on one of China’s stock exchanges.
So has China been the one saving Hong Kong or was it really the other way round? Occupy Central triggers China’s nerve because it poses real threats to China’s financial stability.
Will Occupy Central cause real trouble to Hong Kong?
Hongkongers’ protests are always peaceful. Since the 4/June 1989 rally in support of the students’ movement in China to the 1/July 2003 demonstration, how many windows had been broken by protesters?
The peacefulness of the protesters in Hong Kong is extraordinary. The only broken glass we have since in Hong Kong after the 1967 riots was a glass in the Legislative Council that was thrown at CY Leung.
Hongkongers are simply too violent!
CCP does not have the guts to repeat another Tiananmen in Hong Kong based on CCP’s concerns over its own (China’s) economic situation. This is a macro view, but from a micro and financial relations perspective, CCP will not act against its own economic benefits and wallet.
Occupy Central, therefore, is not going to rock Hong Kong’s status as a financial centre – as the conclusion financial experts around the world have come to. What Occupy Central can do is to reveal to all investors around the world how much “stabilisation power” CCP has over Hong Kong, and whether international capital is more powerful than CCP.
CCP worries that if Occupy Central happens, China has to follow the international standards Hong Kong has in place for decades in order to enjoy the financial benefits, and that the “rising China” story will no longer hold true and China will not be able to surpass the western world – this is the nightmare to China.