I have continued to field a lot of calls from US investors who are concerned about China’s tightening grip on Hong Kong. It is clear that the portrayal of China as Public Enemy No. 1 by the White House is behind this apprehension. Having lived and worked there for 10 years I share their disquiet but not for the geo-political reasons which are grabbing most of the headlines.
Since I left in 1999 Hong Kong’s traditional role as a gateway to and from China has accelerated. Whilst no longer the critical path for manufactured goods that it once was nor enjoying the old monopoly it had before 1979, its capital markets have grown several times over. It has been the listing of choice for hundreds of PRC companies. From the rather dreary state owned enterprises that came to the market back in the 1990s, mainland firms now account for over 70% of the market with several of China’s biggest firms now listed there (the startling quality of their businesses in stark contrast to much of the grisly stuff being listed in the early 1990s (I was involved in several B and H shares listings and was left wondering why international investors were clamouring to buy businesses that seemed rooted in the 1950s)). Hong Kong is the destination for large Chinese companies, hitherto listed in the US, seeking a safe haven given the current Sino/US political tensions. Through Hong Kong Connect, cross border trading of Chinese securities now accounts for some 7-8% of turnover. Although not as dependant on foreign capital as it once was now over 60% of China’s cross border funds are raised in Hong Kong.
But it is not just the stock market that has been transformed. The sale of derivatives, private banking, money market transactions (payments through the USD CHATS system amounted to more than $10trn in 2019) and insurance have all grown likewise.
The growth of these markets has been facilitated by first class institutional infrastructure from the HKMA downwards. The good governance provided by Hong Kong regulation has allowed it access to developed financial markets with a first class counterparty credentials.
China is keen to nurture Hong Kong’s pre-eminence as a financial centre and it is ear marked to lead the charge on capital markets in the Greater Bay Area – a zone spanning the Pearl River Delta consisting of 11 cities and home to more than 70m people.
The reason why all this extra wealth creation has left the local Hong Kong population underwhelmed is obvious. Its achievement has not been designed for their benefit. If they do not like it there are plenty of Chinese citizens who will be eager to take their places. I am saddened about this. And lest you think this is just nostalgia on my part, I have several friends who are still there and for whom Hong Kong has been home for generations. One told me that if he were 15 years younger he would emigrate. He is in his mid-50s and remarked candidly “we didn’t always love you Brits but at least there was the rule of law and you let us get on with it and we improved our lives”. He is by no means certain that further improvements are now in the offing. Another looks on aghast at the “abdication of duty” by the Hong Kong Chief Executive. Disaffection amongst the youth is also easy to understand: daily immigration from the PRC, stagnant salaries and sky high property prices leave many in constrained circumstances, living with parents in small apartments. Now there is the added threat of summary justice north of the border.
If you had told me back in 1997 that “one country two systems” would have survived until 2020 without the sort of interference that it is now experiencing I would have expressed pleasant (and hopeful) surprise. It always seemed clear to me that Beijing would want to make Hong Kong “just another Chinese city”. In this it is succeeding. China will keep pushing up to the point where it believes it might risk compromising the Hong Kong’s financial infrastructure and the advantages that flow therefrom.
Despite my concern at the way things are turning out for the indigenous population, as “just another Chinese city”, Hong Kong still looks pretty good as one of the world’s preeminent financial centres.
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