Taipei, Taiwan – Like many Hong Kong residents, accountant Edelweiss Lam spent the past week watching the city's stock market erase 14 months of gains as the Hang Seng Index fell below the psychological threshold of 15,000 points.
This was not the first time Lam, who has been investing intermittently in Hong Kong stocks since the late 1990s, had seen this happen.
The index fell below 15,000 points during the period of SARS in 2003, the global financial crisis in 2008, and zero coronavirus lockdowns in 2022.
But while ebbs and flows are part of the investment game, Lam said watching the main gauge of Hong Kong's stock market fall “back to square one” looks different this time.
“It seems like I can't see the future,” Lam told Al Jazeera by phone from Hong Kong.
Lam said the reason is China.
With Beijing increasing its control over all aspects of life in Hong Kong, including the economy, and continuing pessimism about the state of China's post-pandemic recovery, investors have been voting with their money and looking to other markets.
More than a quarter century after Hong Kong's return to China, Hang Seng has returned to what it was during its final days as a British colony.
On Friday, the index was hovering below 16,100 points, lower than it was on July 1, 1997, the day of delivery.
During the same period, stocks boomed in the United States, Japan and other popular markets.
Investors in the SP500, the most popular measure of US market performance, have seen their money grow nearly 10-fold since 1997.
“If there is any new announcement from the Chinese government regarding regulation or control of certain industries, the market could fluctuate very seriously,” said Lam, whose investment portfolio includes blue chips, term deposits and real estate.
“The relationship between Hong Kong and China is becoming closer and closer, and the control is stricter, so we cannot ignore what they are doing in China.”
Hong Kong has been on the front line of China's crackdowns in recent years, from imposing a strict national security law on the city to tightening regulations for giants such as Alibaba and Tencent and raids on foreign companies on the Chinese mainland.
Many major Chinese companies are dual-listed in Hong Kong and China and make up a large part of the Hang Seng Index alongside Chinese banks and other technology companies.
At the same time, China's economy is struggling to recover from the impact of COVID-19 and Beijing's harsh pandemic restrictions, amid troubling structural issues including a shrinking population, rising local government debt, and a slow-moving real estate crisis.
GDP officially grew by 5.2% in 2023, the weakest performance in decades, excluding the pandemic.
Despite Beijing's insistence that China is open for business, foreign investor confidence is waning.
Last year, China recorded its first decline in foreign direct investment in 12 years, with inflows falling by 8 percent to $157.1 billion.
“When we look at the broader business sentiment for the financial sector and the overall economy, first of all, the economic fundamentals in both Hong Kong and China are not in a very good place right now,” said Shim Lee, a China analyst at the Washington Institute for Research. The Economist Intelligence Unit told Al Jazeera.
Li said China's achievement of its economic growth target last year “was not particularly impressive” as Beijing set a relatively weak target.
Analysts estimate that about $6 trillion – equivalent to more than a quarter of the US economy's output – has been wiped out of stock markets in China and Hong Kong since early 2021.
China's CSI 300 index, which measures the 300 largest companies on the Shanghai and Shenzhen stock exchanges, has fallen more than 40 percent over the past three years, while the Hang Seng Index has fallen 50 percent over the same period, according to Bloomberg data.
Instead, investors are flocking to other markets such as Japan and the United States, where analysts expect 2024 to be bullish.
The Nikkei 255, an index of the largest companies on the Tokyo Stock Exchange, hit its highest levels in more than 30 years last week, while the S&P 500 in New York closed at an all-time high for the sixth straight day on Thursday.
“[Hong Kong’s] The Chinese economy may now be little more than a large rounding error in China's GDP, but it still plays an important role in financial and capital market transactions for and with the mainland. So it is clear that bearish sentiment and high stock price valuations in China have spread [Hong Kong] George Magnus, a researcher at the China Center at Oxford University and a research associate at SOAS in London, told Al Jazeera:
The rollback of rights and freedoms in Hong Kong — which are supposed to be guaranteed until 2047 under an agreement known as “one country, two systems” — has exacerbated a crisis of confidence.
Since the national security law was passed in 2020, political opposition and independent media have been eliminated in the city, and hundreds of people have been arrested for non-violent crimes related to activism and expression.
Hundreds of thousands of Hong Kong residents have left the city amid Beijing's tightening control along with their money.
Lam said she decided last year to move her pension fund overseas, and plans to sell her remaining equity investments in Hong Kong at a loss.
“They say they want to do something, but we don't see real action,” Lam said of the government's economic policy.
In October, Hong Kong reduced stamp duties on property sales and share transfers, but consumption and tourism have yet to recover to pre-pandemic levels.
Analysts say reviving the economies of both Hong Kong and China will require bolder measures.
Beijing is considering a potential $278 billion bailout of the stock market, Bloomberg reported this week, citing sources close to the matter, but many analysts say broader structural reforms are needed to restore investor confidence.
A similar rescue plan, deployed after China's stock market tumble in 2015, produced mixed results – even though the government moved quickly and the overall economy was in a stronger position.
Memories of that bailout and fears that Beijing won't undertake difficult but necessary reforms are one reason the rescue plan has received a lukewarm response, said Alicia Garcia Herrero, chief economist for Asia-Pacific at Natixis.
“Here the market is really saying, 'I'm sorry you're not growing. I don't trust your numbers; your future looks bleak — which wasn't the case in 2015. It was seen as a temporary shock, so I think that's the difference initially.'
It can also be argued that Beijing has less room to maneuver this time thanks to its high debt levels and limited scope for monetary easing.
“They used a lot of bullets, and the next bullet is less reliable,” she said.
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