The recent protests in Hong Kong opposing a proposed law that would allow extradition to mainland China have plunged the region into its first recession in a decade. Hong Kong’s economy shrank 3.2 percent in the third quarter of 2019, after a contraction of 0.5 percent in the second quarter. The immediate aftermath of the protests and their economic impact has set the stage for a series of questions among financial observers. Will Hong Kong remain a global financial hub? How will the protests impact Hong Kong’s business role in greater bay area? What will be the future of China-Hong Kong relations?
The common belief is that Hong Kong has lost to Singapore on the business front after it saw a major escalation in violence. This is because the perception of the heightening risks to businessmen and investors, especially with the arrest of a Citigroup banker, an employee at BNP Paribas quitting the company after showing support to protestors on social media, and the assault of a JP Morgan banker outside the company’s office. Also, the disruption of transport and normal day- to-day business functions have further stoked fear among the business class.
Truth be told, Hong Kong’s highly integrated network of firms and financiers have pulled through wars and economic depression in the past. And it’s the tenacity and survival skills that make the region irreplaceable in the Asia-Pacific.
The Hang Seng Index was up four percent for 2019 — and the IPO market remained resilient despite the political distress. In September, Anheuser-Busch InBev raised $5 billion in the second biggest IPO of the year on the Hong Kong Stock Exchange. That in turn has positioned the Hong Kong Stock Exchange the third largest in capital raised in the world after the New York Stock Exchange and the Nasdaq.
China’s response to Hong Kong’s water revolution
After months of protests, China’s government signalled a forceful intervention that was anticipated to further drive political tensions in the Chinese territory. The National People’s Congress warned that it would use its power to overrule the territory’s judiciary. Although Chinese officials perceive the protestors as extremists — a large part of the crisis has been left to be handled by Hong Kong’s leader Carrie Lam.
But to tighten control, China’s leader Xi Jinping in a meeting asserted that the first step toward the political crisis is to stop violence and ‘restore order’. For months, Hong Kong protestors have fought strongly demanding that the Chinese government to allow the region to enjoy its freedom that was granted after the end of British colonisation.
Also, China has promised to take action against the US if it continues to show support for protestors in Hong Kong. This move stemmed from President Trump signing the Human Rights and Democracy Act into law. In essence, the act allows the US to monitor Beijing’s actions in Hong Kong and to ensure the latter’s autonomy is maintained. However, fears of Chinese military action and a US-China confrontation over Hong Kong amid the trade war have since then dissipated.
Hong Kong has become ever more essential to the Asia-Pacific
In the 1970s, Hong Kong slowly evolved into a financial and trade centre in the Asia-Pacific and further strengthened its position in the region after returning to China. Its geographic proximity and long-term bilateral cooperation with Southeast Asia gives Hong Kong an irreplaceable advantage compared to other economies in the world.
In the last decade, the value of bilateral trade between Hong Kong and the Asean countries increased by 72 percent. As of 2016, there were 547 Asean firms in Hong Kong and 54 of them were headquartered in the region itself, observed the Census and Statistics Department of the Hong Kong Special Administrative Region.
According to Li Xingyu, who is an executive director of the Socio-Economic Research Centre at the Associated Chinese Chambers of Commerce and Industry of Malaysia, Hong Kong shows the strongest international competitiveness in finance. It appears that investors in Hong Kong have created several job opportunities and generated heavy tax revenue in the 10 Asean countries.
One of the most significant factors that highlight Hong Kong’s financial relevance to the Asia-Pacific is the fact that it is only a global financial centre — and not a nation. This means the ongoing protests might only undermine Hong Kong’s total economic output but not affect its financial ecosystem comprising firms, financiers, business services and regional corporate management. That in turn clearly suggests that the status of Hong Kong as a pre-eminent financial centre is likely to remain secure.
Abhineet Kaul, who is the Senior Director of Public Sector and Government at Frost and Sullivan (Asia Pacific), said in an interview with International Finance, “Hong Kong has been the most vibrant market to raise capital due to strong fundamentals and differential regulatory regime as compared to the mainland. Although the political turmoil has created some spill overs to Singapore, the geographical location and presence of a dynamic financial industry will ensure Hong Kong will continue to be the primary market in East Asia.”
Although many reports have been doing the rounds that the crisis will spoil Hong Kong’s appeal as a financial hub — it remains strongly protected by four factors. These factors include its ease of doing business, its link between China and the rest of the world, the rule of law, and the lack of other alternatives.
On the positive side, the region’s financial markets are drawing confidence from the Chinese ecommerce firm Alibaba’s multi-billion dollar public offering. Alibaba raised $11 billion through its share sale in Hong Kong — making it the year’s biggest listing so far. This implies that investors and firms are as of now not deeply disturbed by the current political crisis. “It will be interesting to keep an eye on future listings in Hong Kong to understand the real impact,” Kaul says.
It is worth remembering that Hong Kong’s famed one country two systems model is a stronghold because it allows it to have a high degree of autonomy from China. And the reasons why reports repeatedly state that Hong Kong is gradually losing its financial centre status is due the potential risks to the high value of its stock market that is worth 12 times its gross domestic product. That said, there is a certain level of threat to its status as a financial hub with rivals such as Singapore, Tokyo and Shanghai showing noticeable trends of gaining in terms of the growth of financial firms.
With regards to banking, however, Hong Kong is still the single largest market for Standard Chartered, accounting for nearly a quarter of the bank’s $15 billion operating income in 2018. Also, it is the fourth largest market for Citigroup after the US, the UK and Mexico.
Hong Kong is China’s ‘window to global capital’
China’s centralised authority and heavy financial dependence on Hong Kong is what encouraged Xi Jinping to adopt a ‘take all approach’. Hong Kong is extremely important to China for two reasons. First, although China has an extensive capital control — Hong Kong is one of the biggest markets for equity and debt financing. The second reason is that even with Hong Kong’s economy size equivalent to 2.7 percent of China’s it outweighs Chinese cities as a financial centre due to its globalised financial and legal systems. And this is essential to China’s development.
“While the development of Hong Kong has been tied to the Greater Bay Area over the last 22 years, we expect the current political turmoil to create short-term diversions between the development stories,” Kaul says. “Over the longer term, the development narrative of Hong Kong and the Greater Bay Area are expected to converge again, as the fundamental reality and business linkages are difficult to replicate.”
In terms of trade, Hong Kong’s port continues to handle a major portion of China’s exports and imports. In 2017, data showed that 90 percent of annual transit trade carried out by Southeast Asia through Hong Kong eventually reached the mainland.
In 2018, Hong Kong became China’s largest trade partner with a market share of more than 20 percent surpassing the US at 17 percent. According to China’s Commerce Ministry, Hong Kong is vital to China’s long-term ambition to make the yuan compete with the US dollar, making it a widely-used international currency.
But in Kaul’s view, “Due to political reasons, we don’t expect China to overly rely on Hong Kong. Anyway, with AIIB and the OBOR initiatives, China has diversified the geographical locations of its ambition of yuan being seen as a parallel to US dollar in international markets.” China’s ambitions for its currency is critical to its strategy to overtake the US as an economic power.
Behind the scenes, China will not allow Hong Kong’s internal security to be affected. The Chinese government has issued a warning that it will analyse foreign financial firms that might be considering to relocate to another Asian city away from Hong Kong. Consequently, those firms would lose any financial opportunities the region might bring to them in the future. Likewise, the Hong Kong government is responsible to maintain the one country two systems framework — and China will fully back the Hong Kong government’s efforts.
The Chinese officials remain clear that Shanghai is their domestic international financial centre and Hong Kong is their global centre. Kaul points out that with regard to Shanghai, competitiveness depends on whether the mainland relaxes its regulatory regime. “At least till the year 2047, Hong Kong is expected to have an edge over Shanghai in terms of capital and financial markets,” he adds.
Why Hong Kong will remain resilient despite protests
There is no equal alternative to Hong Kong in the Asia-Pacific. Tokyo is a global financial hub for Japanese and foreign firms eyeing the country’s market, but foreign financial firms including those in Asia have rarely used Tokyo as their platform for business development or raising capital.
But some financiers consider Singapore a viable alternative to Hong Kong. In this context, it is important to note that Singapore’s financial firms largely focus on Southeast Asia and not Asia-Pacific region as a whole. With that, its network reach becomes weak in Asia. But it might be true that Singapore stands to benefit from Hong Kong’s recent troubles, primarily because they are both commerce-friendly. Singapore ranks second and Hong Kong fourth in the World Bank’s ranking of 190 countries for the ease of doing business.
The high-net worth individuals in Hong Kong and China have found Singapore to be attractive. In 2017, Chinese property buyers acquired more than 1,000 private homes in Singapore despite a 20 percent stamp duty charge to foreigners.
In the big picture, however, one of the chief reasons Hong Kong should retain its status as the primary financial hub of Asia into the future is because of the “presence of an experienced financial or professional services talent pool, inertia in shifting regional headquarters in the short-term, and good liquidity at Hong Kong Exchange,” Kaul explains. In fact, some of the main financial firms and financiers who manage capital exchange in Asia-Pacific between the region and the rest of the world are housed in Hong Kong — strengthening its position over its rivals.
The future of Hong Kong in the financial world is intact
Rising concerns about Hong Kong losing its status as a global financial centre are misconstrued. On the contrary, Kaul says advantages stemming from Hong Kong’s world-class legal and financial systems will continue into the future. “Hong Kong has been an attractive hub for talent from across the globe offering professional services such as legal, audit, and financial services. The restrictions in the mainland markets would mean that Hong Kong will continue to retain its prominence in these fields,” he explains.
Hong Kong’s financial eco-system is vital to China’s access to financial markets around the world — and Chinese leaders will do everything in their power to secure the region’s position despite their denunciations. This is because Hong Kong has played a significant financial role for China over the last two decades. But the main question is whether Hong Kong will retain its role as financial firms and markets on the mainland evolve?
Hong Kong is a major renmibi hub and financial centre but rivals such as Singapore, Sydney and other places have renmibi deals. Despite that, Kaul says “Hong Kong will remain a key hub for relationships between China and the developed world in the West and in Asia.”
Focusing on the regulatory ecosystem to remain competitive is extremely important to Hong Kong. Kaul explains that “One big area where Hong Kong lags behind Singapore and Shanghai is the lack of entrepreneurial ecosystem related to digital solutions in the financial industry,” — meaning that the region will have to innovate on new fintech solution approaches to maintain its relevance despite China’s backing.