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Tuesday, July 03, 2018, 10:39
HK retains role as Asia’s leading financial center
By Daniël De Blocq Van Scheltinga
Tuesday, July 03, 2018, 10:39 By Daniël De Blocq Van Scheltinga

Time seems to move faster and faster; already it is 21 years ago that the Union Jack was lowered for the last time, the Five-Star Red Flag raised and Hong Kong returned to the motherland. In 21 years the Hong Kong Special Administrative Region has reached what in many countries is just the threshold of legal maturity. But it’s not too soon to reflect on where Hong Kong stands as one of the financial capitals of the world, and its prospects. 

First of all, as far as Hong Kong as a global financial center is concerned, the improbable, unlikely and seemingly impossible “oil and vinegar mix” that we know as “one country, two systems” has worked. The many who left Hong Kong before the city’s return to the motherland, and the doom-sayers who predicted the demise of Hong Kong (such as in the infamous 1995 article in Fortune magazine titled “The Death of Hong Kong”), have all been proven wrong many times over. Many of those who can afford it have since returned.

Hong Kong remains one of the most important financial centers in the world and the top financial center in China and Asia. Financial services remain a core sector for the Hong Kong economy: according to government statistics, the sector employs about 7 percent of our workforce and contributes 18 percent of Hong Kong’s GDP. Hong Kong Exchanges and Clearing Ltd (HKEx) statistics also show a number of records were broken last year: 2017 saw the highest number of new listings, and the highest total market capitalization, and a much higher daily turnover than 2016 did. As far as the financial sector is concerned, the difficult years of SARS and financial crises seem far behind us.

The facilitating roles of Hong Kong in both the Belt and Road Initiative and Guangdong-Hong Kong-Macao Greater Bay Area will revolve largely around financial services and Hong Kong will therefore play crucial roles in the central government’s financial markets strategy

Secondly, as the economic boom on the Chinese mainland has accelerated since Hong Kong’s return to China, the city has benefitted immensely. This is very true in the financial sector; a clear indication of this is the number of mainland companies listed on HKEx, which represent roughly half all listed firms. The upcoming $6 billion initial public offering of another mainland company, Xiaomi, will not only reinforce Hong Kong’s role as the world’s leading capital-raising center but continues to increase the balance in favor of mainland companies. The recent inclusion of mainland stocks by Morgan Stanley Capital International (a highly regarded and trusted stock index creator) in their emerging-markets index makes it easier for international institutional investors to invest in A-shares. This benefits Hong Kong as much of the flow will go through the city.

Thirdly, this strengthening of Hong Kong’s role has occurred despite the demographic and economic realities; Hong Kong is a Lilliput compared with the rest of China. When China resumed exercising sovereignty over Hong Kong, the city represented roughly 16 percent of the country’s total GDP. Today this has shrunk to less than 3 percent. Hong Kong’s population is less than a third of that of Shanghai, and smaller than any of the 15 largest cities on the mainland. There has been talk in the past of Hong Kong needing to watch its back as other, substantially larger, Chinese cities would replace its leading position in the financial world. However, Hong Kong’s enviable track record in banking and international financial services makes this highly unlikely. Shanghai will continue to grow and evolve but it should be viewed as a partner financial hub, and not a rival. Hong Kong’s role as a financial center is not decided by size.

Fourthly, clearly one reason Hong Kong as a financial center has worked is that it is part of the overall Beijing strategy. “One country, two systems” truly makes sense when looked from the perspective of the financial sector. Perhaps it even makes more sense today than it did 21 years ago. On the one hand Hong Kong provides exchange-rate certainty through the US dollar peg, a familiar and robust legal system, a strong pool of international financial talent, English as an official language, first-class infrastructure and the most successful anti-corruption body in Asia if not the world. On the other hand, the mainland provides a dynamic and fast-growing market, ambitious companies with global growth strategies, increasing links (such as Stock and Bond Connect) to other national financial centers, and national strategic projects, such as the Belt and Road (B&R)Initiative, which have important financing and financial structuring needs.

 As our financial sector continues to evolve and explore a meaningful role in other areas such as fintech or green financing, it will continue to grow as we are receptive to new ideas. The facilitating roles of Hong Kong in both the B&R and Guangdong-Hong Kong-Macao Greater Bay Area will revolve largely around financial services and Hong Kong will therefore play crucial roles in the central government’s financial markets strategy. Our position as Asia’s premier financial center is secure. As the Hong Kong government states in its own video presentation: “The Best is Yet to Come”.

The author is a strategic adviser to both private and public sectors on China-related matters. He has advised a number of financial institutions on their China strategy.


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