Facing headwinds from heightened geopolitical rivalries in the region and rising interest rates in the United States, Hong Kong’s financial industry has retained its competitive edge and shown huge potential for growth. Hong Kong’s petite size undeniably understates its mighty presence in the global financial market. Following the release of the “Global Financial Centers Index (GFCI) 33” report by Z/Yen from the UK and China Development Institute from Shenzhen in March, Hong Kong-based financial practitioners expressed confidence in the future competitiveness of the city as an international financial center (IFC). Responding to questions raised by the compilers of the GFCI, interviewees also considered Hong Kong as one of the IFCs that would become more significant over the next two to three years.
The latest GFCI report points out that Hong Kong’s performance in the four areas of business environment, infrastructure, financial sector development, and reputational and general rose by two places compared with the previous report. Maintaining fourth place in the GFCI’s report, Hong Kong is proud of its competitive edges and unique advantages. These unique advantages will be explored in the following discussion.
There is a wealth of literature on Hong Kong’s emergence as an IFC. Like main arteries, several drivers of success, which have been identified and used metaphorically by scholars, are regarded as the most important parts of the blood transmission network that have helped maintain the health and vibrancy of Hong Kong’s IFC. These drivers are: a financial governance model based on a commitment to economic freedom and an adherence to the rule of law; political stability; a credible regulatory infrastructure; low taxation; and proximity to an increasingly affluent China (J.J. Woo, Business and Politics in Asia’s Key Financial Centers: Hong Kong, Singapore and Shanghai).
The heart, which is at the center of the blood circulatory system, provides oxygen-rich blood to maintain the healthy functioning of our body. Like the heart, strong support from the central government for Hong Kong’s IFC serves as a propulsive mechanism to vitalize the drivers of success so as to maintain the normal functioning of our financial markets and meet the requirements of an IFC. Because of space constraints, we will only focus on the “central government factor” in the following discussion.
First, the determination of the central government to maintain Hong Kong’s status as an IFC has been set out clearly in Article 109 of the Basic Law. Section 1 of Chapter V of the Basic Law has provided necessary safeguards to shield the above drivers of success from interference or disruption. As enshrined in Article 8 of the Basic Law, the common law system shall be maintained. In addition to protecting property rights and liberties, the common law system provides a legal safeguard against excessive government intervention and facilitates the smooth functioning of Hong Kong’s free markets.
Second, it is worth noting that the 14th Five-Year Plan (2021-25) confirms the important function and positioning of Hong Kong in the overall development of China. Hong Kong will continue to consolidate its IFC status and give full play to connecting markets and investors of the mainland and overseas, serving our country’s needs with our strength. In July 2022, President Xi Jinping stated clearly that the “one country, two systems” policy must be upheld in the long run.
Third, the mainland’s rapid economic development has provided strong backing for Hong Kong. The special administrative region has been able to benefit from the mainland’s phenomenal rise over the past few decades by tapping into its financial liberalization process and becoming a leading offshore renminbi center amid increasing external use of the currency. At present, Hong Kong is the world’s largest offshore RMB hub with deposits of nearly 1 trillion yuan ($139.46 billion) in total at the end of 2022. Because of the enormous offshore RMB business, Hong Kong is in some ways the envy of other offshore RMB centers. Most importantly, the offshore RMB business has lifted our competitiveness as an IFC.
In order to increase the investment opportunities for offshore RMB, the central government has built some RMB backflow channels. It’s hoped that HK’s leading role in RMB investment and management in the international market will contribute to the internationalization of the yuan.
Hong Kong has served as a strategic conduit to facilitate the backflow of offshore RMB. Five channels have been opened so far: dim sum bonds, RMB qualified foreign institutional investors, a domestic interbank market, cross-boundary RMB loans, and the Shanghai-Hong Kong Stock Connect. In addition to the Shanghai-Hong Kong Stock Connect, Shenzhen has also been included in the Connect Scheme. The recently built channels are: the Swap Connect Scheme; an expansion of the offshore RMB-bond-issuing program; and the dual counter stock trading program. These channels also promote mutual market access.
Fourth, the central government supports Hong Kong’s endeavors to become a global fundraising hub. Many “China concept stock” issuers have returned to Hong Kong through either secondary or dual primary listings. At present, there are over 1,300 mainland enterprises listed in Hong Kong. Hong Kong Exchanges and Clearing is also planning to revitalize the Growth Enterprise Market to provide small and medium-sized enterprises and startups with a more effective fundraising platform. Because the central government wants Hong Kong to become a biomedical innovation center, the city should encourage pharmaceutical startups to raise funds here.
Fifth, the Cross-boundary Wealth Management Connect Scheme in the Greater Bay Area and the dual-counter stock trading scheme have won full support from the central government. As at end-2020, the assets under management of the asset and wealth management business in Hong Kong grew by 21 percent year-on-year to nearly HK$35 trillion ($4.48 trillion), about one-third of which contributed to net fund inflows. With the rising numbers of high-net-worth individuals in the GBA, the Cross-boundary Wealth Management Connect Scheme will provide our financial sector with greater room for development.
Sixth, Hong Kong is collaborating with mainland institutions to expand the testing of e-CNY as a cross-boundary payment facility in the city. The launching of e-CNY will further contribute to the internationalization of yuan. Finally, cross-boundary fintech projects are also endorsed by the central government. These fintech projects may become new drivers of growth in our financial markets.
With strong support from the central government, Hong Kong should ramp up efforts to keep abreast of global financial trends, which include fintech, green finance, ESG (environment, social and governance) initiatives, central banking digital currencies (e-HKD), virtual asset tokenization, and bond issuance. Besides focusing on the financial needs of our country, Hong Kong needs to maintain its status as an IFC by connecting the mainland with the outside world. Hong Kong should also explore opportunities in the Global South.
The author is an associate professor with a keen interest in private equity, stock analysis, social networking and corporate governance.
The views do not necessarily reflect those of China Daily.
