China. It’s the world’s second-largest economy. So, surely there’s a way you can invest in it, right? There is.
It’s called the Hong Kong stock market. Why not invest in China directly?
Well, that’s because China’s stock markets in Shanghai and Shenzhen make it super difficult for anyone outside China to buy stocks listed there.
So, known as “the Gateway to China”, Hong Kong has thrived as an open financial centre where investors can easily access the massive China market.
What does the Hong Kong stock market look like?
The Hong Kong stock market is operated by Hong Kong Exchanges and Clearing Ltd (SEHK: 388), which is itself a listed company!
The total market capitalisation (market cap) of ALL the companies listed on the Hong Kong stock exchange is around HK$36.8 trillion (US$4.7 trillion).
A lot of Chinese state-owned companies went public in Hong Kong in the 2000s. Most of them are rubbish companies which, unsurprisingly, turned out to be terrible long-term investments.
That’s because the Chinese government is pulling the strings behind the scenes. And they’ve not been the best at running businesses for shareholders.
These companies might be good for China’s national interests, but for people investing in them, it’s been a pretty horrible ride. Known as state-owned enterprises (SOEs) they included state-owned banks – like China Construction Bank (SEHK: 939), telecoms companies – like China Mobile (SEHK: 941) – and energy firms, like PetroChina (SEHK: 857).
However, there are also many amazing privately-run firms listed on Hong Kong that investors can access.
In the 2010s, many of these winners were technology giants like Tencent Holdings Ltd (SEHK: 700). These continued to grow and innovated constantly.
Hong Kong’s market also differs to mainland China’s onshore market (namely A shares), where the stock market is much more speculative than Hong Kong’s.
Instead of the majority being institutional investors (like it is in Hong Kong), 70-80% of the stock trading in China’s A shares market is driven by retail investors.
This can lead to much more volatility and share prices rarely reflect the reality of how the actual businesses are performing.
So, what are the biggest sectors of Hong Kong’s stock market?
The Hang Seng Index in Hong Kong is the most recognisable stock market index and is made up of 76 of the largest and most liquid stocks on the Hong Kong stock exchange.
Again, like the US, technology is becoming more important in Hong Kong’s stock market.
However, unlike American stock markets, the Hang Seng Index is actually a reflection of companies that thrived in the 20th century.
What do I mean by that? Well, companies such as banks, insurance companies and property firms, have long dominated the benchmark Hang Seng Index.
Even today, they still make up over 33% of the Hang Seng Index in Hong Kong.
These types of companies tend to be poorly run, not innovative and protected by their monopoly status – both in Hong Kong and China.
That’s because the city’s wealth was built on these old (let’s just be honest, now dying) industries.
However, now you have a new generation of technology and consumer superstar stocks that are starting to dominate the landscape.
What are Hong Kong’s biggest companies?
Some of the largest companies in Hong Kong include the well-known Chinese technology heavyweights such as Tencent, Alibaba Group Holding Ltd (SEHK: 9988) and Meituan Dianping (SEHK: 3690).
Tencent has a market cap of over US$400 billion and Alibaba has a market cap of over US$200 billion, while Meituan Dianping is over US$100 billion.
The biggest listed companies in Hong Kong are dominated by technology names but there are also some financials stocks that can be grouped in with the big boys.
One such stock is AIA Ltd (SEHK: 1299), a pan-Asian life and health insurer that has a sizeable presence across the Asia-Pacific region.
Clearly, for the Hong Kong market, the attraction to investors is the appeal of large and growing China-focused companies.
As the stock market’s makeup has changed over the past few decades, more of investors’ money is flowing to China stocks listed in Hong Kong.
There’s also the big elephant in the room; the US and China’s geopolitical tensions. As a result, many US shares of Chinese companies are seeing their investors switch into their Hong Kong shares (if they’re dual-listed).
Overall, the reasoning to invest in Hong Kong stocks is pretty simple; access to companies that service an increasingly rich population of 1.4 billion people.