When China sneezes, much of Asia-Pacific catches a cold. Hong Kong-listed stocks and the ETFs that track those shares should see a doctor. Surprisingly, Hong Kong’s Hang Seng was trading slightly higher at the time of this writing, just after 2AM Eastern time Tuesday, although the Shanghai Composite was down 2.42%.
Earlier in the session, China’s CSI 300 Index plunged 5.1% to touch its lowest levels in over four years. Investors continue to bet that the People’s Bank of China will take measures to avoid a property bubble, indicating that the central bank is willing to sacrifice near-term appeasement of investors in riskier assets in favor of steady, sustainable long-term growth. In the wake of last week’s SHIBOR headlines, the PBoC said it sees “reasonable liquidity” in the Chinese banking, but investors are still shaken and those tremors could affect Hong Kong ETFs. [China ETFs Plunge After PBoC Comments]
The SHIBOR spike prompted concerns that the world’s second-largest economy is facing a liquidity crunch and partially explains why China ETFs heavy on bank stocks, such as the iShares FTSE China 25 Index Fund (NYSEArca: FXI), have incurred double-digit losses in the past month. The iShares MSCI Hong Kong Index Fund (NYSEArca: EWH), which allocates over 60% of its weight to the financial services sector, is down 11% in the past month and 7.1% in just the past week. [Hong Kong ETFs Down on China Data]
Making matters worse for the $2.2 billion EWH is news that did not get a lot of U.S. press Monday. Moody’s Investors Service lowered its outlook on Hong Kong banks to negative from stable.
“The change in outlook reflects Moody’s concerns over persistent negative real interest rates and potential property bubbles in the territory, and banks’ growing exposures to Mainland China, all of which may contribute to adverse future operating conditions for Hong Kong banks,” said the ratings agency in a statement.
While Moody’s noted Hong Kong banks are sufficiently liquid and well-capitalized, conditions the agency expects will persist, the firm highlighted the growing mainland China exposure of Hong Kong banks along with soaring property prices in Hong Kong.
“Residential, commercial, and industrial property prices in Hong Kong have all more than doubled since 2009 and are currently at historically high levels. There is growing integration between Hong Kong’s economy with that of the Mainland. While the economic integration creates business opportunities for banks and their customers, it also entails risks,” said Moody’s.
Making the outlook all the more murky for EWH is Moody’s prediction that bad loans at Hong Kong banks will rise and that the territory’s peg to the U.S. dollar is “is likely to be one trigger for a cyclical deterioration in asset quality.”
EWH is not the only Hong Kong ETF that could be bit by slumping bank shares. The iShares MSCI Hong Kong Small Cap Index Fund (NYSEArca: EWHS) has an almost 21.2% weight to the financial services sector.
iShares MSCI Hong Kong Index Fund
ETF Trends editorial team contributed to this post.