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The demise of Hong Kong as “Asia’s World City” is an incredible boon for Singapore. As Beijing tightens its grip with a new security law, all Singapore needs to do, many suggest, is sit back and welcome the exodus of banking and finance jobs.
Everyone except for the folks at MSCI Inc, who seem not to have gotten the memo. In late May, the same week China announced its legal bombshell, the influential index provider said it’s shifting licensing for derivatives on a number of gauges from Singapore to Hong Kong.
The deal MSCI inked with Hong Kong Exchanges & Clearing Ltd. involves 37 futures and options contracts tied to its Asian and emerging-market barometers.
That boost for the Hong Kong body will leave Singapore Exchange Limited (SGX) out in the cold. News of SGX’s pending revenue shortfall sent its stock down 12% in a single day, the biggest drop in 17 years.
It also should have investors throttling back on the “Hong Kong-is-dead” chatter. Such doomsday predictions, of course, are not new.
Foreign media has been declaring the city dead for 25 years – starting, infamously, with Fortune’s 1995 “The Death of Hong Kong” cover story. Similarly, gloomy exposés became de rigueur around the 1997 handover back to China.
At every turn, though, Hong Kong proved the magazine-cover curse of missing the point to be alive and well and has remained a laissez-faire mecca for multinationals.
Now, though, China is writing a new chapter. Its move to impose a still pending national security law by fiat has been widely viewed as the death knell for Hong Kong’s special status and freedoms.
The legislation will seemingly put at risk the city’s free press, judicial autonomy, corporate transparency and sanctity of the banking system.
It could also see US President Donald Trump’s administration revoke Hong Kong’s special trade status, jeopardizing some $66 billion of commerce, and open the door for targeted sanctions at the same time the US Congress is making it harder for Chinese companies to list in New York.
Yet all indications are that speculation of Hong Kong’s latest demise are even more exaggerated than previously.
That was certainly the gist of recent comments made by Hong Kong Chief Executive Carrie Lam on June 9, a date of significance marking the first anniversary of the start of major demonstrations against an extradition bill Beijing tried to impose on Hong Kong.
On that day in June 2019, close to one million Hong Kong protestors took to the streets. Subsequent protests that tilted towards chaotic violence prompted Lam to shelve the controversial bill.
Lam’s plan now? Beef up Hong Kong’s status as a financial hub with China’s help to make the city even more appealing to multinational companies and financial institutions. Hong Kong, Lam says, will be “promoting greater connectivity” between its markets and the mainland’s.
“Over the years we’ve had the Shanghai-Hong Kong stock connect, Shenzhen-Hong Kong stock connect and the bond connect,” Lam says. “There are other connectivities that we’ve been talking about, whether we could have an insurance connect, an IPO [intial public offering] connect or private wealth connect.”
The idea, she says, is “to make Hong Kong more international, to turn Hong Kong into a more prominent offshore renminbi center, to transform Hong Kong into the hub for the management of private wealth.”
It’s not a farfetched vision. For one, there is the steadying presence of reform-minded and well-respected Laura Cha as new head of the Hong Kong Stock Exchange (HKSE).
Cha’s over-a-decade role as deputy head of Hong Kong’s Securities and Futures Commission even reportedly impressed former Chinese premier Zhu Rongji, arguably Beijing’s greatest reformer of the last 20 years.
Meanwhile, top Chinese officials are bending over backward to reassure global investors. Beijing, said Vice-Premier Liu He, “will adhere to the policy of ‘one country, two systems’, and give support to Hong Kong as it plays the role of an international financial center.”
Speaking at a business forum in Shanghai, Liu said: “We will ensure that the interests of foreign investors in Hong Kong will be protected and Hong Kong’s long-term prosperity can be achieved.”
Household corporate names, from HSBC to Standard Chartered to Cathay Pacific parent Swire Pacific to Jardine Matheson, all say they are on board with Chinese President Xi Jinping’s national security gambit for the city.
The same is true for developers Sun Hung Kai Properties, New World Development and Li Ka-shing, the former head of CK Hutchison Holdings and CK Asset Holdings.
This is not music to the ears of Hong Kong naysayers.
British banking giants and Hong Kong stalwarts HSBC and Standard Chartered are already getting an earful from a high-profile investor: UK asset management firm Aviva Investors. It’s criticizing both for siding with Beijing on measures it fears will hollow out Hong Kong’s economy.
“We are uneasy at the decisions” to support a law for which there are few details, said David Cumming, chief investment officer for equities at Aviva Investors. “If companies make political statements, they must accept the corporate responsibilities that follow.”
The issue, though, is how Hong Kong’s government leverages closer ties with Xi’s Communist Party to buttress its financial hub status. Rather than holding a funeral for “old Hong Kong,” said analyst Simon Pritchard of Gavekal Research, multinationals will merely adjust to the new one.
“On balance,” Pritchard said, “the effect will be to make Hong Kong a more Chinese city, whose economic success is tied to international transactions being undertaken by mainland entities.”
This could change the face of Hong Kong as a finance hub – and could well enhance it.
“The locus of economic activity will shift even more towards mainland capital-raising and the process of internationalizing the renminbi,” Pritchard continued.
“Thus, even as Hong Kong loses its unique identity and is potentially excluded by a range of institutions on a stand-alone basis, it is plausible that it sees more capital flows and risk-taking activity emanating from the mainland,” he said.
The core of Xi’s plan is the “Greater Bay Area” that will link Hong Kong, Macau and the mainland metropolis of Guangzhou. Even as Beijing imposes new security constraints on Hong Kong, it’s detailing plans for a financial services sector hub in nearby Hainan, an island known more for tourism than banking.
But rather than feel threatened by a potential new trading hub in the neighborhood, Hainan’s emergence might catalyze Hong Kong to raise its own game.
“We should seize every opportunity of the deepening of reform and opening up of the mainland economy, whether it’s the central level or at the provincial level, as opportunities for Hong Kong,” Lam said. Bottom line: “I see a lot of synergy and potential collaboration.”
Nowhere are the synergies greater than in the market-connecting arrangements Hong Kong and China have been building since 2014.
The first was a cross-boundary channel linking the Shanghai Stock Exchange with Hong Kong’s. The scheme enables punters to trade shares across markets employing local brokers and clearinghouses. In 2016, a stock-connect “through-train” was opened between Hong Kong and Shenzhen.
It’s vital that Hong Kong builds on this exclusivity factor, cementing its role as China’s financial “green zone”, analysts say. That means prevailing in the next Hong Kong-Singapore battlefront: China stock futures.
As Beijing liberalizes China’s financial markets, dealing in hedging tools for mainland equities holds vast potential.
Singapore, no doubt, will fight back. About 36% of SGX’s total revenue between January and March came from equity-derivatives sales.
But the rival city-state is losing ground in offshore currency trading as Hong Kong wins more business from mainland companies. It also is suffering from a dearth of listings, particularly as India moves trading in some futures contracts to Mumbai.
Hong Kong is arguably at the right place at the right time. Last year, China’s bond market surpassed Japan’s to become the second-largest worldwide. In May alone, foreign institutional investors poured $30 billion into mainland debt, a 31% jump over the comparable 2019 period.
Coming eight years after China surpassed Japan in gross domestic product (GDP) terms, the current surge in bond activity means two things.
One: Rumors of the Chinese meltdown on which hedge fund manager Kyle Bass of Hayman Capital Management and his ilk bet may be greatly exaggerated. Two: The explosive growth of China’s financial system – and demand for renminbi-denominated assets – will take Hong Kong along for the ride.
In 2017, when Chinese and Hong Kong regulators approved a bond-connect scheme, the mainland market was worth $9 trillion. Today, that figure is $13 trillion and stands out as an unlikely safe haven as pandemic fallout slams global markets and China’s economic growth registers at its slowest rate in 30 years.
China is opening in other ways that auger well for Hong Kong. While Donald Trump’s trade war disrupted trade flows, Xi’s government is pushing ahead with financial market-opening measures for overseas banks, insurance companies and other financial services outfits. That includes increasing access to stocks and bonds while getting added to major global indexes.
This liberalization is helping to blunt Trump’s charges that China is not accessible enough to American capital. As growth in these sectors rises, Hong Kong is still well-positioned to be the Asian city of choice for multinational corporate headquarters.
Indeed, China’s financial market liberalization could actually increase capital flows into Hong Kong’s economy, while also creating many new high-paying jobs. Money management is but one such potential boom area.
Much will depend, of course, on whether Lam’s government is able to strike a fine balance between greater fealty to Beijing while preserving the attributes that make Hong Kong special.
Bruno Lee, chairman of the Hong Kong Investment Funds Association, is “still confident” the city will be a “major” financial center even after Covid-19 and last year’s mass protests. After an adjustment phase, that is.
The industry, Lee notes, is facing a “period of significant change and disruption. Amid this rapidly evolving landscape, there are a number of notable opportunities for the industry in Hong Kong to develop and grow in the next five years.”
That’s a challenge not just for industry leaders, but also for Lam’s government. Investment funds are paying close attention to Hong Kong’s process of integration with 10 other zones as part of the Pearl River Delta economic zone.
Singapore and Taiwan hope to benefit directly from Hong Kong’s social tensions, recession and security law fallout. Both are now actively angling to pull more multinational headquarters away from Hong Kong.
“In the Sinic-investment sphere, Singapore and Taiwan offer great advantages and familiarity,” says Jeff Kingston, head of Asian studies at Temple University’s Tokyo campus.
Even so, Singapore isn’t seeing the deluge of capital you might expect given the “R.I.P.-Hong Kong” narrative.
Total foreign currency non-bank deposits in Hong Kong amounted to $564 billion at the end of April, 20% higher than a year ago. Nor are there any indications in bond market circles of an explosion of inflows since then. In fact, upward pressure on the Hong Kong dollar suggests the opposite.
Still, Hong Kong faces a Trump problem. Along with stripping the city of its special trade status, Trump and Secretary of State Mike Pompeo are hinting at targeted sanctions. Such a step would be a “lose-lose” for the US and the greater China region, opines Louis Kuijs of Oxford Economics.
But even with US threats and pressure, it seems likely more big business is headed Hong Kong’s way. For instance, overseas yuan-trading is already increasingly shifting from London, Singapore and other neighboring cities to Hong Kong.
China’s fast-swelling bond market will also see increased issuances and dealings that could enhance Hong Kong’s gateway-to-China role. Trading in South Korean won also may be pivoting towards Hong Kong.
Now’s the time, some analysts and investors say, for Hong Kong to make a play for both businesses. Hong Kong’s increasingly symbiotic relationship with the mainland, they say, is a strong selling point.
That’s particularly true if Lam’s government pushes to give 1.4 billion mainlanders greater access to international investments traded through Hong Kong.
That could include lobbying Beijing to increase daily quotas in the north-south stock connect schemes and stepped up efforts to market Hong Kong as the top hub for North Asian currency trading.
In fact, Hong Kong’s new challenge may be how to handle all the new capital zooming its way. In recent weeks, the Hong Kong Monetary Authority has intervened heavily to maintain the Hong Kong dollar’s fixed peg to the US greenback, with the unit now trading at the high end of its band.
The HKMA has sold the equivalent of more than $6.1 billion of local currency to sterlize heavy inflows since late April. To be sure, those inflows are partly related to the massive IPO of gaming firm Netease.
E-commerce giant JD.com also pulled off a headline-grabbing listing. As these deals accumulate, the buzz surrounding Hong Kong’s resilience may attract even more overseas capital, some analysts suggest.
In recent weeks, punters have been more inclined to short the Hang Seng. On the last day of May, for example, short-selling volumes were reportedly at their highest level in two decades, accounting for around 21% of total turnover.
The Hang Seng Index, though, is now roughly 50% cheaper on a price-to-earnings basis than the S&P 500. As overseas players note, those betting against Hong Kong’s dollar peg are likely to be disappointed.
Still, there are plenty of reasons for anxiety for Hong Kong’s proponents and investors, says Eurasia Group analyst Michael Hirson. Though last year’s protests were provoked by a bill that would allow extradition to China, they also were rooted in the city’s chronic and rising inequality.
Hong Kong’s Gini coefficient, a measure of income inequality, is now near a 45-year high at 0.539. That puts a city famed for luxury high-rises and larger-than-life tycoons behind nations like Guatemala and Paraguay, both well-known for their gaps between rich and poor.
“To extract itself from this jam, Hong Kong will have to reinvent itself,” says Marshall Mays, director of Emerging Alpha Advisors.
“It will have to rebuild its social contract at home. It will have to learn to say ‘no’ to the wrong money from the mainland. And it will have to focus on being what it has been in the past: an efficient – in terms of time spent – entrepôt to trade and investment,” May says.
Investors have long compartmentalized Hong Kong’s many contradictions. Free-market evangelicals like Milton Friedman looked past Hong Kong’s pegged currency, oligarchic property market, the only government-owned Disney theme park on earth and the fact that its leader is chosen in Beijing and still labeled the territory “the globe’s freest economy.”
Hong Kong’s sustained appeal, now as ever, relies on the government’s ability to juggle and smooth those contradictions. But there’s reason to believe Hong Kong’s leaders and regulators can strike that balance, proving the city’s chronic naysayers wrong yet again.