HK economy

China has opened up for almost 30 years and HK is always on the receiving end for quite some benefits economically, herebelow categorize this era of openness of China and how HK has benefited from it:
1978-1988 - this was a time when HK acted mainly as a tradesman to the import of all kinds of consumer goods into China because of the shortage of such goods due to the cultural revolution which affected production and innovation of all kinds of consumer and industrial goods. HK reaped extraordinary margins because China did not have info on the pricing of such goods, as long as demand existed, they would import. China also relied a lot from HK for the foreign exchange generated from food/other supplies to purchase necessary goods for the state and its people.
1989 - 1991 - China factor to HK was still positive even though the Tianmen incident caused a drastic drop in confidence for the middle class and had prompted an immigration wave among them. Desert storm of Kuwait also interrupted enconomic activity for a while.
1992 -97 - HK acted, for the first time, as the financial middleman for China first batch of SOEs to list on HK's stock exchange thus reaping unseen gains for the management of these companies who then started to invest such proceeds in all sorts of investment - listed companies, properties in HK/Macau/China. This led to total loss of confidence by overseas investors during the Asian crisis and such activities ground to a halt and these listed companies incurring heavy losses. The GITIC, Guangdong Investment, Guangnan all fell under heavy debt incurred by such blind investments. A lot of enterpreneurs also moved their production base into China during this era after Deng convinced people from HK that China would not revert to old habits of pruning enterpreneurs.
1997 - 2002 China was still suffering from the investment mania of the early 90s, but HK entrepreneurs were moving with lightning speeds their production into China or expanding them due to increased business. Because of retaining the profits here in HK, the slump in property sector was mitigated by such increase in business.
2003 - present - After the SARS epidemic, HK economy hit its lowest point in the cycle and has been up ever since. China's accession into WTO created another round of IPOs that must be listed to shape them up against foreign competition. After having opened up for over two decades, the China SOEs or their own breed of enterpreneurs are encroaching the turf once held by those from HK. Because HK factories mostly fall under preferential tax scheme and also the so called material import processing, they pay limited taxes and have enjoyed a long while special status. The trade war between China and US/EU created undue strains because of ensuing trade surpluses. China has so much exchange reserves these days that they do not need the HK enterpreneurs to generate even more thus straining trade relations further with the west.

What will happen now to HK enterpreneurs in the future years to come as they have been wealth and employment generators for HK in the past 30 years?

The outlook for them is gloomy, in fact some of them have already fallen under because of complacency on competition or because of factors turning against them unnoticed or should we say, they did not pay enough attention to the macro changes after China's accession into WTO.

These enterpreneurs are facing unprecedented adverse factors against them and when they fall under, the wealth generation factor in the past would evaporate and many of them may have to sell their investments in HK in the process, just take a look of the eight prominent factors against them:

1. rising of minimum wages - minimum wages have risen for the past few years, if they keep on rising and they cannot raise prices with the customers, margins will be erased and any goods recall such as the current Mattel episodes, such factories are doomed to fail;
   
2. the rising yuan - pricing with customers have to factor in the rising yuan as export prices are mainly USD and their costs mainly Yuan based, so if their forecast is off a few percentage points, margins can become nil or negative ie the more you produce the more you lose;
   
3. environmental protection - most factories pay little attention in the past, but with more and more toxic materials entering the food chain, China now pays more attention to these issues and would only add further costs to production;
   
4. export policy changes - China recently announced that 1500 type of raw material imports must be supported by deposits paid in advance and to be offset or payback on exports for all material import processing concerns [most HK factories are in this category ie export based].
   
5. tax policy changes - in the past, profits are kept in HK companies although their activity is limited to processing the trades through banking channels, China is challenging this practice via the HK/China tax treaty disclosures and also transfer pricing disclosures.
   
6. labor shortage - because China has been developing the middle and western provinces for a few years already, there are now more opportunities for the peasants and they do not want to travel long distances to work in factories that are like labor camps to them. Some surveys said that in Dongguan, there are 1.5 jobs to 1 job applicant, the labor shortage is serious.
   
7. power shortage - the growth of power supply is slower than the demand for electricity, therefore every factory has to invest in alernative power generation to ensure smooth production, this also increases costs further.
   
8. corruption - there has always been corruption in the past, but never has it been so serious as these officials are more greedy than any time in history since the arrest of the gang of four, but they are also under pressure from the central government not to let loose on labor, environment and tax issues. corruption is like protection money, once you pay you are protected, but not now, you pay yet you are still not protected in any way thus many enterpreneurs are doubly charged.

Enterpreneurs from HK can no longer afford to be complacent about their future any more, the later they react, the more HK will suffer.

UPDATE - HSBC & SHG A

Most HK investors have blind faith in HSBC being the stock that has unbelievable staying power to resist any stock crash and recovers in no time.

Now look carefully at these two charts, the playout in the next 2-3 months is critical.

In the 2 year chart, it hits a high of 152 in Nov 06, but it never manages to get to that price again. Now look further into the 6 month chart, it is obvious that there is a neckline forming at 142. It breached upward through 142 in mid April, hit 142 again at end of June, breached downwards again on 27 Jul and bounced back up. Truly, a multi top with neckline at 142 has been formed. The first high of 148 happened early May and it never reached 147 again since April.

This is a classic case of unloading big chunks of one stock. Usually funds would sell into strength and hold back on weakness to avoid the price crashing thereby forming a double or multi top, thus it takes a 5-8 months to unload without causing major incidence. By mid August, we reach the 5 month danger zone, if it does breach downward and hit 138, stays below 142, you will see a minimum of 132 that takes no more than 2 months to reach this target from the time it breached 142 and stays below.

Watch the playout CLOSELY if you have major holdings in HSBC. It also has -ve implications for the index and other stocks as a whole.

The timing could coincide with a mini crash in SHG A share index [it could easily breach the 5000 mark throwing itself into danger zone as it is in the third leg up phase already]