Facing anemic trading, Hong Kong considers staying open in foul weather

The city’s stock exchange, whose trading volumes have sunk to multi-year lows, is the only major bourse that closes during inclement weather

Key Takeaways:

• The Hong Kong Stock Exchange has suspended trading for three days this year due to bad weather, resulting in an estimated HK$336 billion in lost turnover
• The exchange is exploring ways to boost its low trading volumes, with traders suggesting ideas like lowering the stamp duty on trades

By Fai Pui

Hong Kong’s stock market may be a proxy for the massive Mainland Chinese market, but in many ways it still feels like a relative financial backwater. When Typhoon Koinu hit the city last weekend, the market had to close for half a day just as Mainland Chinese investors were returning to work from their weeklong National Day holiday.

In fact, Hong Kong is currently the world’s only major exchange that closes for bad weather. The Shanghai and Shenzhen exchanges on the Chinese mainland, as well as the New York Stock Exchange and Nasdaq in the U.S., Frankfurt Exchange in Germany and Tokyo Exchange in Japan and many others all stay open during inclement weather and even natural disasters.

This quirk of Hong Kong, which bills itself as an international financial center, often baffles and exasperates investors. People on the Mainland even joke, wondering if Hong Kongers are trading their stocks outside in the open air. 

But the jokes are no laughing matter, leading to lost revenue for both the exchange and Hong Kong government, in addition to the reputational damage. In the past three years alone, the exchange closed for five entire days due to bad weather. Three of those came this year, the first two due to typhoons and the third after the city was hit by some of its worst flooding in years.

Stock trading is an important source of revenue for the exchange and local government, meaning trading halts can result in considerable losses. The exchange’s daily trading volume averaged around HK$112 billion ($14.5 billion) in the first eight months of 2023, meaning this year’s three days of suspension cost the city about HK$336 billion in lost trading value. Since the exchange charges 0.00565% in commissions on trading, that means it lost nearly HK$38 million. Likewise, the city’s government lost nearly HK$874 million in tax revenue it would have gained from the current 0.13% stamp duty.

“Many Hong Kong securities firms provide international stock market trading services with their systems functioning normally, rain or shine, and there are always people working to maintain the trading systems and customer services,” said Edmond Hui, CEO of Bright Smart Securities. “If Japanese, Korean, U.S. and European stock markets can trade as usual in bad weather, why should Hong Kong stop trading?”

Change on the way?

In response to this quirk that sets Hong Kong apart from its peers, the city’s government is reportedly considering a proposal to keep financial markets open during typhoons, with Financial Secretary Paul Chan instructing a task force to submit a feasibility report in a few weeks, according to a Bloomberg report, citing unnamed sources. Some say the city’s Chief Executive John Lee could even touch on the subject when he delivers his policy address later this month.

Some believe that the unpredictable closures can sometimes lead to forced selling and margin calls. That’s because such weather-related closures affect the entire city, including banks, which can force brokerages to personally liquidate some of their clients’ positions to manage risk, according to Bright Smart’s Hui.

Regional laggard

Trading volume in Hong has decreased sharply in recent months due to weak sentiment, sending the Hang Seng Index to repeated fresh lows for the year. The index was down by 13.2% year-to-date as of last Friday, underperforming other major stock markets in the Asia-Pacific region. Last week trading volume in Hong Kong sank to a new low not seen since December 2018, as many mainland-based investors took a break from trading during the National Day holiday.

The recent weakness may owe to disappointment at China’s economy, which has failed to bounce back strongly this year after the country ended its “zero Covid” policy and launched a steady stream of stimulus measures that weren’t as forceful as many had hoped.

Ongoing U.S.-China tensions have also led foreign investors to pull money from stocks in both Hong Kong and on the Mainland. Morgan Stanley said in a report earlier this month that global funds further reduced their holdings of Mainland-traded A-shares and Hong Kong stocks in September, with total net divestment in September reaching $3.2 billion.

High U.S. interest rates are another factor drawing money away from the region, including expectation that rates will stay high for a while. Other local investment products like time deposits and green bonds also have yields generally above 4%, making them a safer bet than lackluster Hong Kong stocks.

Some investors may even find Mainland-listed A-shares more attractive than Hong Kong stocks these days, said UOB Kay Hian analyst Curtis Yeung. “Global investors are still concentrated in U.S. stock markets, and those optimistic about the Chinese market will choose to buy A-shares because they offer more diversity than Hong Kong stocks,” he said.

Acknowledging the weak trading volumes, the Hong Kong government set up a task force in August to explore measures to increase stock market liquidity. Some investors hope resulting actions could include a reduction in the stamp duty on stock trading, which rose from the 0.1% to 0.13% two years ago and made the cost of transactions in Hong Kong stocks higher than other major global markets.

“If total exemption is not in the cards yet, maybe they can consider halving it or only charging one trading party instead of both,” said Dickie Wong, executive director of research at Kingston Securities. “The Hong Kong stock market is bleeding, so the top priority should be stopping the bleeding. As long as trading costs stay high, high-frequency traders will sit on the sidelines.”

Wong also suggested that the exchange could take a page from its U.S. counterparts by allowing investors to purchase quantities as low as just one share per trade, rather than by larger lots that are now required, to lower their costs. As an example, he cited new energy car maker BYD, which now trades at over HK$200 per share, making the purchase of 500 shares for a single lot a costly endeavor. He said allowing investors to trade in smaller quantities could help to attract a new generation of young investors.

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