Hong Kong Shares Hit 11-Year Low. Alibaba and Tencent Lead Decline.

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Hong Kong stocks ended a bleak week down more than 1% Friday, pushing the benchmark index to an 11-year low, as the once-towering financial hub edged closer to a recession.

The city’s Hang Seng Index fell more than 3% on the week to 17,933.27, lower than in October 2011, when markets around the world tumbled on fears that Europe’s debt crisis could spark a global recession.

The recession now at hand is in Hong Kong itself. “There is a very high chance for Hong Kong to record a negative GDP growth for this year,” Financial Secretary Paul Chan told reporters Thursday.

Leading the decline were Hong Kong’s tech stocks, which have fallen nearly 37% this year, significantly more than the main index.

Alibaba Group Holding

(9988.Hong Kong) lost 3.03% on the day,

Tencent Holdings

(700.Hong Kong) 2.83%, rival

JD.com

(9618.Hong Kong) 3.39%, and

Meituan

(3690.Hong Kong) 2.79%.

All are down at least 30% over the past year.

The reasons for the possible recession are the same plaguing the city’s exchange, analysts said. These include the city’s continued Covid restrictions and interest rate increases following those from the U.S. Federal Reserve, which on Wednesday approved its third consecutive increase of 0.75 percentage points, adding that more was to come.

HSBC Holdings

and Standard Chartered followed by raising their main lending rate in Hong Kong for the first time in four years, which will particularly hit the ease of borrowing for homeowners and businesses.

There has also been a precipitous weakening of the Chinese yuan, and 70% of Hong Kong earnings come from the mainland, Hong Hao, chief economist for Grow Investment Group, told Barron’s from Hong Kong.

Ongoing U.S.-China rivalry, in economic, political, and military spheres, hasn’t helped matters, he said.

Nearly all major markets in Asia, Europe, and Australia were down Friday as well. But there are reasons to be hopeful, analysts said.

On Friday, officials said they were finally scrapping what had been one of the world’s most draconian Covid travel regimes. After two years of lengthy and expensive quarantine measures, overseas travelers will now only need three days of home surveillance, with limited movement in the city.

Also on observers’ minds is what impacts the outcome of the U.S.-China audit agreement will have on the Hong Kong stock market.

If the deal succeeds, and most Chinese companies aren’t booted off New York exchanges, they will have less reason to list in Hong Kong, and the city’s bourse will see fewer IPOs. There is a bigger picture, said Bruce Pang, chief economist for Greater China at

Jones Lang LaSalle
.

“If the deal fails, more Chinese ADRs would have to seriously reappraise and revisit their options of listing venues. Hong Kong will definitely be on the top of their list. This will bring structural opportunities to the Hong Kong market with a reshaping of the investment landscape, even though there may be only long-term gains with short-term liquidity crunch,” he told Barron’s.

“If the audit inspectors are satisfied with outcomes, market sentiment will improve—or at least not decline—with fewer disputes and less tension between China and the U.S.,” he said.

Pang sees the role for Hong Kong as the gateway to the mainland for foreign businesses and China’s world-class offshore financial center as alive and well.

China’s securities regulator this month also announced expansion of the Stock Connect program, which allows retail investors around the world to trade stocks in Shanghai and Shenzhen through Hong Kong.

The plans include expanding the universe of stocks that are traded through the connect, flexibility on which currencies are used for trading, and the introduction of treasury bond futures at the Hong Kong exchange.

With these upgrades in mind, analysts at Goldman Sachs Group recently appraised the

Hong Kong Exchanges & Clearing

itself, saying, “More mainland China-Hong Kong connections means more opportunities. Buy.”