The ongoing massive deleveraging and re-leveraging scheme happening across mainland China and Hong Kong has sent waves through global financial markets as participants grow increasingly wary of the possibility that Asia will be the catalyst that tips the world into a recession. In Hong Kong in particular, pessimism is widespread, especially with the property bubble starting to deflate.In spite of the fact that the Hang Seng continues to gain traction and rally, fundamentals in the special economic zone are crashing fast.Leading indicators of economic momentum reversing lower are a strong sign that the rest of the economy and the Hang Seng equity benchmark are set to follow the lead lower.Even though the Hang Seng is trading just shy of the highest levels since January and may have further room to run higher, the index is still mired in an ongoing bear market amid shifting fundamentals.

Faltering Indicators Overshadow Relief Rally

Hong Kong retail sales plunged the most since the Asian financial crisis that swept through the region in the late 1990s.The consumption figure fell by the largest amount in 17-years, plummeting by -19.50% year over year through the month of February in a sign that consumers are increasingly uncertain about the outlook as China undergoes a massive devaluation.The reason the two situations are linked is the tourism factor, which Hong Kong relies upon for its retail sales performance.With the ongoing revaluation of the Yuan, mainland consumers are traveling markedly less, drastically impacting the local economy as individuals desperate to move capital out of the mainland work furiously to shelter funds across the globe in real estate and other areas.One area that has not benefited from the exodus and reallocation of capital is the Hong Kong real estate market.

After overheating to a spectacular degree in the last few years, the rapid price appreciation in the region is correcting downwards in an increasing aggressive manner.The Hong Kong house price index which hit a record 143.46 in August, has since retreated to 129.11, the lowest level since 2014.The step decline has seen prices decline over 10% from highs with some analysts anticipating the correction could see housing prices fall by as much as 30% total.To put this move in perspective, approximately a decade ago, US housing prices peaked before correcting massively and foreshadowing the crisis.Equity benchmarks followed this momentum lower after peaking themselves in the year after housing peaked.The correction in the Hong Kong real estate sector will very likely have similar implications for the Hang Seng as investor anxiety rises thanks to high volatility and capital flight from risk assets.