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Monday, Sep 21, 2020

Have anti-government protests cooked Hong Kong’s financial goose?

Half a year has passed since the turmoil began, bringing disruptions to business, a retail sales slump and a recession in the third quarter. In the second part in a series on the road ahead for Hong Kong, we look at the city’s special role as a gateway into mainland China

Shifting jobs from a media company to a Hong Kong financial services business seemed like a good move to Lau. His wife had just had a baby and the new job offered flexible hours and better earnings. That was a year ago, but it didn’t pan out like he planned.

As anti-government street protests spread through this city of 7.5 million people since June, the financial planning services his company offered were clearly not a priority for residents.

“New customers have halved in recent weeks – from meeting seven to eight potential customers to three or four, resulting in a 30 to 40 per cent drop in salary,” said Lau, who requested that his first name not be used.

“Some potential customers who cancelled said they have no interest in this kind of future financial planning right now,” said Lau, who is in his mid-30s and has a commission-based salary.

Lau’s problems are an example of how businesspeople in Hong Kong – one of the world’s premier financial centres and a funnel for hundreds of billions of dollars in investment in and out of China – have faced disruptions caused by the protests and rallies.

Tear gas and Molotov cocktails do nothing to help the city’s image, but at the grass-roots level the chaos in transport networks, such as the firebombing of subways and tunnel tollbooths, means businesses can’t function. Lau said many of his meetings were cancelled because people just couldn’t get around.

That’s reflected in other figures. Retail sales fell almost 25 per cent in October and tourist arrivals plunged by half in November. Financial Secretary Paul Chan Mo-po said the city’s economy fell into recession in the third quarter for the first time in 10 years. He also forecast a grim outlook for the next financial year even as the government boosts spending on relief measures.

All of which raises many questions about the future of Hong Kong as a financial and business centre and its role as the prime gateway into mainland China as the city’s economy shrinks.


Hong Kong’s value

China’s top policymaking body on Hong Kong has repeatedly warned that the protesters were destroying the city’s prosperity. Not everyone has such a clear-cut view. Economist Huang Qifan is one example.

It’s “meaningless” to judge Hong Kong’s economic importance to China by the size of its GDP, Huang said at a Nankai University forum in southern Guangdong province on September 10. Shanghai, Shenzhen and other cities may grow much larger in economic terms over the next 20 years, but Hong Kong’s position would be irreplaceable, because of the “one country, two systems” structure, he said.

Huang was the mayor of Chongqing from 2010 to 2016 and took credit for turning it into the biggest economic driver in southwest China. “One country, two systems is good for the development of Hong Kong and especially good for the development of China,” he said.

“The value of Hong Kong lies exactly in being a financial, economic, trade and logistics hub under a capitalist system,” said Huang, who is now a vice-chairman at the state-backed public policy think tank China Centre for International Economic Exchanges.

The “proportion of foreign investment through Hong Kong into China has remained more than 50 per cent [of the total] throughout the last 40 years despite the great changes in China’s economy”, he said.

Recent figures from China’s Ministry of Commerce suggest Hong Kong continues to play that role.

Foreign direct investment flowing through Hong Kong into mainland China grew 10 per cent from January to October this year, and expanded every month since June when the protests began, further highlighting the resilience of the city’s role since its return from being a British colony in 1997.

Hong Kong has been the key to China’s economic success story since the opening up of the mainland economy in the late 1970s. Hong Kong tycoons were the first investors and the city’s contribution to China’s GDP peaked at 27 per cent in 1993. Last year, Hong Kong’s GDP made up a total of 2.7 per cent of China’s GDP, but as Huang points out, GDP size misses the point of the city’s real function within China’s economy.

The city grew into one of Asia’s top financial centres based on rule of law and efficient governance. It was named a special administrative region by China in the handover, when Beijing agreed to give the city a high degree of autonomy under the one country, two systems framework.

Hong Kong’s stock exchange is also still the favoured destination for initial public offerings by Chinese companies. One in every two companies on the Hong Kong exchange is mainland-linked, representing 67.3 per cent of the market’s capitalisation as of last year, according to exchange data.

The biggest recent vote of confidence was the decision by Chinese e-commerce giant Alibaba to choose Hong Kong for a share sale in November. The company raised about US$11 billion in what was Hong Kong’s largest listing since 2010. (Alibaba is the owner of the South China Morning Post.)

The free movement of capital to both onshore and offshore markets has also made the city the largest offshore yuan trading centre, a key role as Beijing pursues efforts to internationalise China’s currency. Hong Kong also offers special access to China’s equity and fixed income markets through the Stock and Bond Connect systems to capital markets on the mainland.


Convenience factor

Larry Qiu, an economist at the University of Hong Kong, said Beijing needed Hong Kong because no other mainland city was in a position to replace its role and importance to China’s economy.

According to the Hong Kong Monetary Authority, nearly 60 per cent of foreign direct investment into China flows through Hong Kong, though much comes from offshore Chinese companies. Last year, 70 per cent of China’s outward investment exited through the city, according to Chinese official data.

Despite the political events, the latest figures showed Hong Kong’s role as the window for capital flow into and out of China was unlikely to change, said Iris Pang, Greater China economist at ING Wholesale Banking.

“All money and transactions that pass through Hong Kong as a financial centre are virtual,” Pang said, “Yes, some people found it hard to get to work, but people can survive. The protests may have affected financial workers’ daily living temporarily but it doesn’t change the convenience Hong Kong provides as a centre for banking and financial services on the whole.”



The protests that started in June represent the biggest political turmoil China has faced in decades. What began as rallies against a proposed bill that would allow extradition of legal suspects for trial in mainland China ballooned into wider calls for universal suffrage.

Beijing authorities have responded with varying levels of irritation and anger to the protests, especially as some demonstrations descended into violence and vandalism, stressing the importance of the integration of Hong Kong into China’s national development and that it will always be ruled from Beijing. China has also characterised the protests as interference in its domestic affairs by foreign interests.

The politics aside, China’s economy is not expanding at the same pace seen in recent years. GDP growth slowed to 6.2 per cent in the second quarter of 2019, the slowest since records began in March 1992. Some bank economists see that trend continuing, which means Hong Kong’s role as a financial centre remains important for the mainland.

“Hong Kong’s economic foundations are based on free capital movement while mainland China still maintains a relatively closed capital account,” said Alicia Garcia Herrero, Asia-Pacific chief economist at Natixis in Hong Kong. “This means Hong Kong can facilitate China’s access to foreign capital.”

But Thilo Hanemann, a partner at research house Rhodium Group, said the protests and the response to them had only had “a minor impact” on investment flows into China as of now, but that could change.

“We haven’t reached that point yet, where the perception of Hong Kong as an investment destination is irreparably damaged,” he said when speaking to diplomats and bankers in Hong Kong in late November.

“But there are looming longer-term concerns about the situation potentially escalating, and undermining the rule of law and institutional set-up that have made Hong Kong such a special place for international investors,” he said.



Qiu at the University of Hong Kong agreed, saying it’s not just capital flows that the city offers, but people flows, idea flows through the internet and media, as well as rule of law. No mainland city could compare at present, he said, but added that Hong Kong’s advantages were narrowing, and the protests may just speed up that process.

Hanemann said some foreign companies had bypassed Hong Kong to enter mainland China’s market directly.

“More foreign companies now take advantage of the bilateral treaties their countries have signed with China to directly deal with China, without needing to pass through Hong Kong,” he said. Protests or not, he said companies were aware of the importance of diversifying risk.

“Despite China being a lucrative market for many foreign companies and investors, those that have other operations in Asia have been looking at diversifying risks and investments to other countries in the region,” Hanemann said.

Lau, the Hong Kong financial planner, doesn’t see much improvement ahead in his business.

“Realistically speaking, I think the economy will hit my industry harder next year, Hong Kong’s future is tough,” he said. “But it’s OK, my job is a lot to do with putting in the hard work. Ultimately, I think Hong Kong will prevail.”

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