Op-Ed by Mark Preen
In recent years, Hong Kong and its economy have experienced turbulence. The territory’s real GDP contracted by 1.2 percent in 2019, following the impact of anti-government protests, and the IMF projects that Hong Kong’s economy will contract by a whopping 7.5 percent in 2020 due to the COVID-19 outbreak. In response to the protests, Beijing enacted a National Security Law in June of this year. While the impact of COVID-19 is likely to be short to medium-term, the region’s sociopolitical tensions have raised concerns about the long-term economic credibility of Hong Kong, including its status as a global financial center.
Concerns about Hong Kong’s status as a global financial center
Hong Kong’s economic credibility is built upon its institutions, which were first established during the British rule of the territory and have continued under its special status following the Sino-British Joint Declaration and 1997 handover. The financial sector has been one of the biggest beneficiaries of this institutional legacy and the free flow of capital in and out of Hong Kong has made the territory attractive to investors. The financial sector now contributes to approximately 20 percent of Hong Kong’s GDP. In the September 2020 Global Financial Centers Index (GFCI 28), Hong Kong ranked fifth behind New York (1st), London (2nd), Shanghai (3rd), and Tokyo (4th).
Following the implementation of the National Security Law, however, there have been concerns about the impact on the territory’s global financial status. Some of these concerns were captured in a sentiment’s survey conducted by the American Chamber of Commerce in Hong Kong in July 2020 – shortly after the enactment of the Law. Among other findings, the survey found that 5.46 percent of companies would consider moving capital, assets, or operations in the short-run whilst another 30.05 percent would consider moving them in the medium to long-run.
There are also concerns that Hong Kong will be caught increasingly in the crossfire of deteriorating Sino-US relations. In response to the National Security Law, the outgoing US president, Donald Trump, already ended the preferential economic treatment of the territory. If relations further deteriorate then matters could spill over from trade into the financial sector. There has even been talk of Washington going as far as cutting Hong Kong off from the US Dollar international payments system, which would be a devastating blow to Hong Kong’s financial sector.
Hong Kong is the main gateway to China
For all the concerns of foreign investors, Hong Kong is still more attractive on balance when compared to alternative financial centers, especially when it comes to accessing the Chinese market. For this reason, Hong Kong remains the main gateway to China.
In comparison to investing in Chinese companies listed in Shanghai or Shenzhen – the home of Mainland China’s two stock exchanges – it is more attractive for foreign investors to invest in Chinese companies listed in Hong Kong. Shanghai and Shenzhen are subject to Mainland China’s capital controls whereas Hong Kong is not.
Even where Chinese companies are only listed in Shanghai or Shenzhen, Hong Kong has the added advantage of stock exchange connection schemes with both cities. These schemes mean foreign investors can invest in eligible Chinese companies only listed in Shanghai or Shenzhen through the more investor-friendly Hong Kong stock exchange.
Going forward, by maintaining a closer relationship with Beijing, Hong Kong is set to strengthen its position with these stock exchange connections. In her recent annual policy address, Hong Kong’s Chief Executive Carry Lam announced an expansion to the connection schemes, which includes allowing foreign investors access to shares on Shanghai’s Star Market – a Chinese science and technology-focused equities market.
Hong Kong’s importance to China and the homecoming of Chinese companies
As well as being important to foreign investors, Hong Kong is an important capital-raising center for China – for both expansions back home and expansion abroad as more Chinese companies look to ‘go global’. One such expansion back home is the ambitious plan to develop the Greater Bay Area for which Beijing needs Hong Kong to play a leading fundraising role. Hong Kong itself is part of the Greater Bay Area, so the development of the area will also lead to the territory’s closer integration with and greater reliance on the Mainland.
More recently, the capital raising role of Hong Kong has become even more important to China as an ever-growing number of Chinese companies are choosing to complete listings on Hong Kong’s stock exchange. Many of these companies are already listed on the New York stock exchange and are completing secondary listings on the Hong Kong stock exchange in anticipation of the delisting of Chinese companies by more hawkish US financial regulators.
These secondary listings in Hong Kong have even been dubbed the ‘homecoming’ of Chinese companies and include tech giants, such as NetEase and JD.com. According to Refinitiv, between 2019 and 2020 the value of China offshore listings in Hong Kong doubled to over US$18 billion. In comparison, the same listing in the US grew by only a quarter to over US$3 billion.
Paradoxically, with this homecoming, Hong Kong is benefitting from deteriorating Sino-US relations rather than being caught in the crossfire. On top of the push from the US, Hong Kong is also adapting to pull Chinese companies to the territory. In April 2018, Hong Kong Exchanges and Clearing Limited (HKEX) changed its rules to allow for a new concessionary secondary listing route.
Putting Hong Kong’s status as a global financial center in context
Hong Kong is increasingly starting to look more like an offshore center for Chinese finance, though the territory remains an important global financial center. Foreign investors, however, appear to be willing to weather the storm, and any concerns have yet to transpire into any large-scale flight. China and Western countries both still need Hong Kong, and Hong Kong has shown its ability to adapt to maintain a strong position.
However, if the political situation in Hong Kong and Sino-US relations further deteriorate then a tipping point could be reached in which the territory’s ability to adapt is significantly diminished, and foreign investors may look to serve their needs elsewhere. In which case, Hong Kong may become more like any other Mainland city and less like a global financial center. How the political situation unfolds will depend upon several factors and remaining uncertainties, including the approach towards China and Hong Kong from the incoming Joe Biden administration in Washington DC.
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done so since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at firstname.lastname@example.org.
We also maintain offices assisting foreign investors in Vietnam, Indonesia, Singapore, The Philippines, Malaysia, Thailand, United States, and Italy, in addition to our practices in India and Russia and our trade research facilities along the Belt & Road Initiative.