Falling Chinese Stocks, Alibaba IPO Loss Dim Hong Kong’s Luster

Falling Chinese Stocks, Alibaba IPO Loss Dim Hong Kong’s Luster
Hang Seng Among Worst-Performing Major Stock Indexes This Year
MIA LAMAR
March 20, 2014 6:14 a.m. ET
Hong Kong’s stock market, a longtime gateway to China for global investors, is losing its luster as signs of financial stress mount on the mainland and the exchange reels from the loss of Alibaba Group Holding Ltd.’s initial public offering.

With a 9% loss so far this year, Hong Kong’s blue-chip Hang Seng 0011.HK -1.42% Index is one of the worst-performing major stock indexes in the world. Mainland stocks listed in the city are particularly out of favor, recording losses of nearly 2% Thursday to send the Hang Seng China Enterprises Index into a bear market.
For some investors, Alibaba’s decision to take its up to US$15 billion IPO to New York merely marks the latest Chinese technology company to head to the U.S., after others such as search engine operator Baidu Inc. BIDU -0.72% –China’s ” GoogleGOOG -0.09% “–and online media company Sina Corp. SINA -0.70%
Others however, bemoan the loss of a fast-growing Chinese company that would have shaken up a stock market heavy on banks and property developers, two sectors struggling as China pushes to clean up its debt-saddled corporate sector.
Dust was still settling in Hong Kong around Alibaba’s decision when China’s Harbin Bank on Monday said it would start taking orders this week for its Hong Kong IPO which, if successful, would be the fourth Chinese lender to go public in the city since November.
“Hong Kong is so heavily dominated by banks that a sharp rally is unlikely even if a best case scenario for China occurs,” said Paul Schulte, who ran emerging-markets strategy and bank research for several investment banks before launching an independent research firm in Hong Kong last year.
Chinese banks account for almost 50% of the total market capitalization of the HSCEI, more than two times what bank stocks account for in other global stock indexes, Mr. Schulte said. “It is the most lopsided market in the world,” he said.
Hong Kong’s tilt toward banking and property—both volatile sectors sensitive to interest rate expectations–bit the city’s investors again Thursday after U.S. Federal Reserve Chairwoman Janet Yellen hinted the central bank could raise short-term interest rates as early as this fall.
Investors who are still sour on emerging markets and preparing for quarter-end are also playing a role in Hong Kong’s market doldrums, said Mansfield Mok, who runs a China-focused stock fund with roughly $150 million of assets for EFG Asset Management in Hong Kong.
“If money is going to move away, it’s going to move now,” he said.
The possibility for more ups and downs as the Federal Reserve settles on the direction of its monetary policy doesn’t bode well for retail participation in Hong Kong which has dwindled in recent years. In the 12 months through September 2013, local retail investors accounted for 18% of turnover in Hong Kong’s cash market, down from 26% five years ago and 34% in the 2003 to 2004 period, according to a report issued last month by stock-exchange owner Hong Kong Exchanges & Clearing Ltd.
Overseas investors in the city, the bulk of which are institutional players like hedge funds and long-only asset managers, remain a steady and dominant player in the Hong Kong stock market, accounting for 41% of turnover in the most recent annual period.
Brokers say that big U.S. and European investors are steering clear of Chinese bank and property stocks of late, narrowing their focus toward a handful of sectors such as Macau casino and Internet-related stocks. That is adding to the influence of Chinese gaming and e-commerce company Tencent Holdings Ltd., which now carries the second-biggest weighting on the Hang Seng Index at roughly 9%.
With a stock price that has more than doubled in the past year, Tencent isn’t untouchable, however. Shares slid 11% last week–its worst weekly performance in a year–after China’s central bank took a tough stance on the growing mobile-payments industry. The company late Wednesday posted its slowest quarterly profit growth in nearly two years, sending the stock down 1.8% Thursday, almost 10% of the HSI’s losses for the day.