Hong Kong’s battered stock market enjoyed its best day in more than two months as investors shrugged off Donald Trump’s announcement from Friday, saying they had feared harsher measures from the US president.

The Hang Seng index closed up 3.4 per cent on Monday despite Mr Trump saying Hong Kong would lose its special trade status from which it has benefited since its handover from the UK to China in 1997.

The US president was responding to Beijing’s announcement that it planned to impose national security legislation on the city, which investors fear would in effect end its semi-autonomous status under the “one country, two systems” model that underpinned its return to China.

But analysts argued that Mr Trump had pulled his punches by not imposing additional sanctions on Beijing. They also highlighted his decision not to rip up the so-called phase one trade deal signed last year between the two countries.

“There isn’t that much negativity that the Hong Kong market hasn’t already absorbed,” said Andy Maynard, managing director at China Renaissance Securities in Hong Kong, adding that many market participants had already discounted a revocation of trade privileges.

He also pointed to a shift in attention to the riots that have rocked US cities following the death of George Floyd, an unarmed black man, at the hands of police officers. “The US’s pain is probably Hong Kong’s gain for the moment,” Mr Maynard said.

Some brokers in the former British colony were gloomy on the market’s prospects over the coming months, however. As well as becoming front and centre in a simmering trade spat between the US and China, Hong Kong is mired in a recession following months of anti-government demonstrations.

“Hong Kong is now the battlefield in the US-China trade war,” said Dickie Wong, director of research at Hong Kong stock broker Kingston Securities. He dismissed Monday’s rise as a “technical rebound”, prompted by bearish traders buying back shares to cover positions previously sold short.

A sense of pessimism threatens to overshadow more positive recent developments, such as plans by Chinese internet groups JD and NetEase to raise billions of dollars through Hong Kong share sales. 

The Hang Seng has dropped almost 16 per cent so far this year, compared with less than 6 per cent for Wall Street’s S&P 500. Based on price-to-earnings ratios, a common valuation metric used by investors, Hong Kong equities are among the world’s cheapest and trade at a small premium to volatile emerging markets such as Argentina.

Mr Wong expects the market to grind lower in coming weeks as the implications of the security law and the withdrawal of the city’s trading privileges become clearer. Chief among those could be downgrades from big credit rating agencies.

“After the rebound today, we don’t see much upside,” he said.

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