The Hang Seng Index, the barometer for the Hong Kong stock market, peaked at an all-time high of 33,154 points on Jan. 26. Just nine months later, on Sept. 11, the index hit as low as 26,399.

The definition of a "bear market" varies, but a downturn of 20% or more from peak in a broad market index (i.e., the Hang Seng) is the most widely accepted use of the term.

Clearly, a lot has changed since those all-time highs from January.

Central District of Hong Kong

Image source: Getty Images.

Specifically, two words: Trade war

To understand why the broad market index has taken such a beating, it's important to note that the majority of constituent stocks of the Hang Seng Index are China-based companies or companies with major streams of revenues from China after the sovereign turnover in 1997.

Thus, even though the Hang Seng Index is synonymous with the Hong Kong market, it's more or less a reflection of the health of the Chinese economy. And the Chinese economy has been mired in a very public trade war with the world's largest economy.

China's trade surplus with the U.S. was $375 billion in 2017. It continues to rise, hitting $31 billion last month. This has not set well with U.S. President Donald Trump, who has launched an all-out trade war with China by threatening to impose 10% to 25% tariffs on all Chinese imports, which total $500 billion.

Theoretically, the country with a trade surplus is hurt more during a trade war -- which is why the Hang Seng Index fell far more than the S&P 500, the most representative broad market index in the U.S. The S&P 500 is actually up about 8% in 2018.

The China growth story

The growth of GDP in China is driven by three forces:

  • Exports
  • Consumption
  • Capital investment

Simply put, the fall in exports due to the trade war may not be fully replenished by consumption and capital investment. The shrinking trade surplus puts devaluation pressure on China's currency, the renminbi or yuan. The yuan has depreciated almost 10% since June. While the Hong Kong dollar is pegged to the U.S. dollar, the downward pressure on the yuan will translate to lower earnings for most Hong Kong-listed companies.

Over the past decade, China's credit boom has been the key factor driving GDP growth. The total debt-to-GDP grew from 141% in 2008 to 260% in 2017. In late 2017, former China Central Bank Governor Zhou Xiaochuan warned that China may risk a "Minsky Moment" -- the dramatic fall of asset prices after a prolonged rise. The trade war could be a triggering factor on its asset bubbles -- particularly the real estate bubble.

As a good broad-market leading indicator, the falling Hang Seng Index increases the anxiety of this slowdown in China's economy.

A short history of bear markets in Hong Kong

As unsettling as they may feel, bear markets are a fact of life for investors.

In Hong Kong, bear markets have hit investors on a regular basis over the past 30 years. Looking at past bear markets in the rearview mirror, you may get a sense of what the next one will look like.

From the chart below, you can see that most bear markets last for 12 months or less. The lone exception was in 2000, when Hong Kong was in a prolonged period of deflation after the burst of a real estate bubble. Given the "high beta" nature of the Hang Seng Index relative to other global stock indexes, the percentage loss was scary: Losses ranged from -45% to -67%.

Peak Time

Hang Seng Index Level

Subsequent Crash

Percentage Loss

Duration From Peak to Trough

October 1987




2 months

January 1994




12 months

August 1997




12 months

March 2000




37 months

October 2007




12 months

Source: Author's calculations.

Surviving a bear market

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