Unprecedented Hong Kong Market Crash Since 2008: Key Points to Understand

China's Market Takes a Hit

Following Goldman's recent upgrade of China's market to Overweight after a 30% rally, it was suggested that the peak had been reached and a decline was imminent. This was further supported by Goldman's trading desk's warning that unless Beijing immediately implemented quantitative easing (QE), China would find itself in a deeper financial hole within a year. This prediction came to fruition on Tuesday morning when China A-shares reopened after a week-long holiday, only to see their gains drastically reduced. Concurrently, Hong Kong markets, which had been open throughout this period, experienced their most significant drop since the Lehman bankruptcy, despite having risen by as much as 30% since the unveiling of the Beijing Bazooka on September 26.

Highlights of the Market Crash

Here is a comprehensive breakdown of the events that transpired in China overnight, courtesy of Goldman's trading desk:

1. What Happened

Hong Kong shares experienced their worst single day since October 2008, with major indices suffering double-digit percentage losses. This was largely due to the National Development and Reform Commission (NDRC) press conference failing to provide fresh details on China’s stimulus plans, leading to disappointment among investors who were hoping for concrete numbers. The HSCEI also recorded its worst day since 2008, plunging 10.2% while the CSI300 opened near limit up +10.8%, faded to +2% and managed to bounce and close +5.9%.

Despite this, A-shares markets managed to close with gains on their first day back, suggesting a rotation out of the Hong Kong market drove the losses. The move essentially erased all of Hong Kong market gains during the break with HSI -9.4% back to levels seen on September 30th. All 82 HSI names, 50 HSCEI names, and 30 HSTECH names closed in the red, indicating the extent of the drawdown.

2. China Retail

An article published by Securities Times discussed prohibiting bank loans to households for stock market investment and warned about the risk of blind speculation. This suggests that China is becoming wary of the growing retail frenzy, especially considering the current administration's experience with the 2014/2015 retail frenzy episode. This could potentially make the government more cautious about how they handle further stimulus policy roll-out.

3. What's Next

Looking forward, ad-hoc meetings in the coming days/weeks are anticipated to re-fuel the stimulus expectations led rally. The next significant event is the NPC standing committee meeting in late October or early November, during which the new fiscal budget is expected to be approved.

Goldman's Take on the Situation

Goldman trader William Chan suggests that while profit-taking is prudent, especially if the sharp rally is behind us, he wouldn't fade the China trade yet. He believes that China might want to pace the market, but the retail community hasn't really started getting involved and the recent change of tone from the government regarding equity market downside, property stabilization, or more stimulus is not something he thinks they will reverse on.

Goldman, which recently upgraded China to overweight, admits it's a bubble, but it's not a full-fledged bubble with retail participation just yet. When it becomes that, Goldman will be selling hand over feet and, eventually, tell its sellside clients to do the same.

Bottom Line

The recent crash in Hong Kong's market, the worst since 2008, paints a vivid picture of the volatility and unpredictability inherent in financial markets. While Goldman's prediction of the decline came true, the question remains whether China's market will recover, and if so, how quickly. What are your thoughts on this unprecedented market crash? Do you think the Chinese government's potential stimulus plans will be enough to stabilize the market? Share this article with your friends and join the discussion.

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