Angel savaged by Hong Kong bears

By Olivia Chung

HONG KONG - Investors in the battered Hong Kong stock market and still with assets to sell gained a breather on Wednesday as prices rebounded after the US Federal Reserve cut its key interest rate by 75 basis points.

The respite for them could be brief, with analysts saying the upsurge may be temporary. Others, notably many of the city's retail share buyers, could watch the recover only from the sidelines, their pockets drained.

Sharp declines in the first two days of the week reminded many retail investors in Hong Kong of the 1997 Asia financial crisis.

Newcomers have learned the bitter market adage - what goes up comes down.

One such newcomer, Angel (not her real name), has been preoccupied since receiving a mobile-phone message sent by her friend and so-called "investment consultant" on Tuesday morning.

Her friend has spent the past few months speculating on stocks on Angel's behalf through margin trading, which allows an investor to buy shares or other stock market products with money borrowed from a broker after putting in some capital as leverage. When prices drop sharply, the broker has the right to sell the shares without the investor's consent to avoid losses unless the latter is willing to put in more capital.

"The market crash has come. The shares you held were just sold out with virtually nothing left,'' the message read. "I'll cover your capital loss, which totals HK$120,000 [US$15,300]. Do not close your account. Once the stock market bottoms out in a few months, I will put money into your account to stir-fry [Chinese slang for speculation] again. Surely you will get your money back. Don't worry."

The message has kept the 38-year-old office clerk from hearing her colleague's lunch-time chat. Watching a ceiling-mounted TV set in the busy restaurant, engrossed in a talk show about the stock falls in Hong Kong, she pretends the tumbling share prices have nothing to do with her, giving her colleague a shrug or a smile.

After work, Angel was more forthcoming. "Though my friend has warned me a few times that I might lose part of the profit of more than HK$130,000 I earned in October, I had never thought all my money, including HK$120,000 in capital, would vanish so fast."

Angel kept her voice low and looked frequently over her shoulder while she talked, afraid of being overheard. Her husband didn't yet know she had been losing all her savings by stir-frying high-risk warrants.

A warrant allows an investor to bet on the price movement of an underlying stock or index. They are particularly popular with Hong Kong retail investors, who can use them to gamble on the market without having to come up with the sums required to buy share board lots.

Even so, if the market moves in the wrong direction, then the holder loses all of his or her investment when the warrant matures. The buyer of a share at least hangs on to the stock and can profit from a later recovery.

"When I talked to my husband about the stock crash on the phone, he joked if I was one of the victims. I was speechless and immediately changed the subject," she said. "I was a bit afraid as I would have difficulty getting any money from him if he knew."

The interview with Angel was surprising not for the secret she revealed but for how little she knew about stock market. Worse, her chum "is not a broker, but she is my close friend who works at computers at a securities house in Sheung Wan [a district on the edge of Hong Kong's Central business district]". Between late September and early October, when stock prices were soaring, her friend turned her initial capital of HK$50,000 into HK$180,000.

Between mid-August and the end of October, Hong Kong stocks jumped by more than 60%, with the benchmark Hang Seng Index closing above 30,000 points for the first time on October 26. Prices were boosted by expectations Chinese mainland investors would pour money into the city's stocks through a so-called "through train" program being proposed by the mainland central government as part of Beijing's moves towards a more relaxed investment environment.

Angel was not alone in trying to benefit from these gains through trading in warrants. Warrants accounted for nearly 20% of the local stock market's turnover in the first nine months last year, and from January to December 14, turnover reached HK$4.49 trillion, up from HK$1.79 trillion in the full-year 2006, according to Hong Kong Exchanges and Clearing.

In late October, Angel's consultant made a bet on a warrant on China Coal at HK$1.22 each and a warrant on Angang Steel at 31.5 HK cents each.

The purchases came as subprime concerns in the US intensified along with growing worries that the US was heading for recession, resulting in the beginning of declines in stock markets around the world.

Aggravating those falls in Hong Kong, it became clear that the proposed through-train program allowing mainland residents to buy Hong Kong-listed stocks would not be initiated in the near term. Chinese Premier Wen Jiabao said on November 3 that the government needed more time to assess the risks of the program to the stability of Hong Kong's financial system.

As stock prices fell and her warrants dropped in value, Angel became a persistent loser, and her account was closely watched by the brokerage. Eventually she was asked her to put about HK$70,000 into her securities account.

Come Tuesday, her consultant dumped Angel's warrants in China Coal at 19 HK cents each and in Angang Steel at 1.3 HK cents. Angel's funds were effectively lost down the drain.

Now she is trusting in her consultant's promise to give her back her lost capital. "My friend sometimes says she will give me it back in a year or two, sometimes she says in a year."

Angel is definitely not the worst loser among the millions of retail investors and speculators in Hong Kong. The Hang Seng Index has lost almost 10,000 points from its record high close of 31,638.22 on October 30. The declines early this week removed some HK$2.5 trillion of market capitalization, taking it down to HK$16.15 trillion on Tuesday from HK$18.65 trillion last Friday.

Since October 30, market capitalization has dropped about HK$7 trillion, or a per capita loss of HK$1.03 million in face value in three months, given Hong Kong's population of about 7 million.

The 13.67% decline in the Hang Seng Index on Monday and Tuesday was its biggest drop since October 28, 1997, when Hong Kong was mired in the onset of the Asian Financial Crisis. Investors north of the border in mainland China were suffering similar pain. There the stock markets in Shanghai and Shenzhen on Tuesday posted the largest single-day drop in seven months, as about 900 of 1,630 A-share companies fell by their 10 per cent daily limit.

All looked brighter by Wednesday morning, after the US Federal Reserve cut interest rates overnight by 75 basis points - the most in more than 20 years - to 3.5%.

The Hang Seng Index opened sharply higher on Wednesday and at 11.45am, it rose about 1,200 points to 22,958. By the close it was up 10.7% at 24,090.17. Even so, the chance for retail investors such as Angel to recoup losses may be short-lived according to Andrew Wong, associate director of One China Securities Limited in Hong Kong.

"It's not a real upsurge as the index dropped by more than 2,000 points on Tuesday. It's a time for speculative investors to sell as I believe the equity market will not bottom out until April, when a real upsurge will form," he said.

"The Hong Kong market is now affected by external factors including the US subprime mortgage meltdown, weak US consumption and worries about a slowdown of China's exports," he said.

Castor Pang, a strategist with Sun Hung Kai Financial Group, warned retail investors that it's not the time for them to look for cheap stocks as the stock market in Hong Kong is in consolidation, which meant it’s still under pressure.

Olivia Chung is a senior Asia Times Online reporter.