Fed Rate Cut Boon for Hong Kong, China Stocks

by: Larry MacDonald

It looks like Hong Kong stocks are in the catbird seat. First, China recently announced plans to allow its citizens to invest in shares listed in Hong Kong.

Stocks currently listed on both Chinese and Hong Kong markets are priced over 50% higher in China; this huge valuation gap should be arbitraged away as the date approaches for outflows of Chinese capital to begin. Second, cuts in the Federal Funds rate by the U.S. Federal Reserve (as seems to be more and more likely) will boost interest-rate sensitive Hong Kong shares (in property, utility, etc companies). U.S. rate cuts will allow Hong Kong, which has pegged its currency to the U.S. dollar, to lower its interest rates as well.

One possible monkey wrench is growing inflationary pressures in China, which Chinese authorities are trying to tame with tighter monetary policies.