Hong Kong was once dubbed the 'gateway to China' and Asia's top financial hub. However, recent violent street protests and the US-China trade war has sent the country plunging into a deep recession, threatening that status. Many analysts and economists are now predicting even more pain for the Hong Kong economy well into 2020.
In this article, we explore the situation and the trading opportunities around the first recession the country has faced in more than a decade. Let's get started.
Why are there protests in Hong Kong?
Hong Kong was a British colony until 1997. Since then the country has been part of China in a unique model of 'one country, two systems'. Under this model, the Hong Kong people have had freedoms unseen in mainland China, as well as a high degree of autonomy.
The recent violent protests which started in June is down to the Hong Kong government passing a bill that would allow suspects to be extradited to mainland China. Many people feared the bill would have undermined the city's judicial independence.
While the bill was eventually withdrawn, the protests have continued into a broader revolt of how Beijing manages Hong Kong. Violent street protests have continued with civilian and police officer deaths.
How have protests affected the Hong Kong economy?
Tourism has been hit particularly hard. In August, arrivals to the city hit their worst level since the 2003 SARS crisis.
Luxury fashion chain Burberry said its sales in the country have fallen by more than 10%. Hong Kong airline Cathay Pacific has cut its profit guidance stating that the civil unrest has severely impacted demand and operations of its business.
Official figures now show that the economy shrank 3.2% in the July to September period. This means the economy has contracted for two quarters in a row which is the technical definition of a recession. Considering economists that were surveyed in a Bloomberg poll were expecting only a 0.6% contraction in that period, it's a very dire sign.
In fact, economist Iris Pang from investment bank ING has forecasted that the economy would shrink in all four quarters next year. So what are the potential trading opportunities surrounding this situation?
Hong Kong dollar vs the Hang Seng 50 index
Traders have two options to gain exposure to a country's economic situation - through its currency or the stock market. However, for exposure to the Hong Kong economy trading its stock market index, the Hang Seng 50 index, is far simpler than trading the Hong Kong dollar.
One reason is the fact the Hong Kong dollar has been pegged to the US dollar since 1983. The Hong Kong Monetary Authority (HKMA), the country's central bank, keeps the currency trading against the US dollar within a set band, or price range, around HK$7.8 per US dollar.
This results in very choppy and wild price action as the weekly chart of the USD.HKD exchange rate shows:
Source: Admiral Markets MT5 Supreme Edition, USDHKD, Weekly - Data range: from 17 April 2011 to 18 November 2019, accessed on 18 November 2019 at 11:45 am GMT. Please note: Past performance is not a reliable indicator of future results.
However, the Hang Seng 50 index measures the overall performance of the 50 largest China-based companies listed on the Hong Kong stock exchange, allowing for a different kind of exposure to the Hong Kong economy.
How to trade the Hang Seng 50 Index
With Admiral Markets you are able to speculate on the Hong Kong stock market index called the Hang Seng 50 index by using a product called CFDs, or Contracts for Difference. Essentially, this enables traders to go long and short on an instrument.
Below is the long-term weekly chart of the Hang Seng 50 index CFD:
Source: Admiral Markets MT5 Supreme Edition, HSI50, Weekly - Data range: from 11 September 2016 to 18 November 2019, accessed on 18 November 2019 at 11:55 am GMT. Please note: Past performance is not a reliable indicator of future results.
This chart looks much cleaner and smoother than the price chart of USD.HKD. In fact, there are clear market conditions and chart patterns visible on the historic price chart of the Hang Seng 50 index CFD, as shown below:
Source: Admiral Markets MT5 Supreme Edition, HSI50, Weekly - Data range: from 11 September 2016 to 18 November 2019, accessed on 18 November 2019 at 11:59 am GMT. Please note: Past performance is not a reliable indicator of future results.
These are the patterns visible on the weekly chart. More patterns will be visible as you adjust timeframes. Let's have a look at the daily timeframe of the Hang Seng 50 index CFD:
Source: Admiral Markets MT5 Supreme Edition, HSI50, Daily - Data range: from 15 January 2019 to 18 November 2019, accessed on 18 November 2019 at 12:05 pm GMT. Please note: Past performance is not a reliable indicator of future results.
In the above daily price chart of the Hang Seng 50 index CFD, it is clear to see the weakness that has gripped the stock market since the start of the Hong Kong protests on 31 March. While its price has been in a decline it is now in a holding pattern, otherwise known as a channel, as marked by the channel lines shown below:
Source: Admiral Markets MT5 Supreme Edition, HSI50, Daily - Data range: from 15 January 2019 to 18 November 2019, accessed on 18 November 2019 at 12:10 pm GMT. Please note: Past performance is not a reliable indicator of future results.
The channel represents a consolidation in price. This makes sense as after the recent sell-off - and to avoid a prolonged recession - the central bank of Hong Kong cut its interest rate to 2%. This is in order to make borrowing cheaper to help stimulate the economy through business investment and consumer spending.
The government has also cut taxes and relaxed mortgage rules for first-time buyers. While they have more than $140 billion available in fiscal reserves to help stimulate the economy they have, so far, refrained from a wide-scale stimulus programme.
However, according to ING economist Ms Pang, "Interest rates don't matter for this economy anymore. When there's violence in the streets, people don't want to go out shopping or go out for dinner."
If this is the case, there could be further pressure on the economy which will affect company profits and foreign investment, thereby weighing down the Hang Seng 50 index. From a charting perspective, if price can break below the blue channel lines in the chart above, there is a high probability chance of a further wave of selling.
How will you be trading it?
If you're feeling inspired to start trading today, or this article has provided some extra insight to your existing trading knowledge, you may be pleased to know that you can download the MetaTrader 5 trading platform provided by Admiral Markets completely free and access the Hang Seng 50 index CFD chart, along with other advanced trading features! Click on the banner below to start your free download:
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