OF THE world’s three great commercial centres—New York, London and Hong Kong—two are on the defensive. London faces a rupture with the European Union, which wants to seize the City’s euro-related activities and shift them inside the currency zone. In Hong Kong the fear is of deeper assimilation by mainland China, followed by irrelevance.
Entrepots, after all, can become obsolete. Venice once teemed with merchants, not tourists. Yet while London’s problem is complacency, Hong Kong’s pessimism seems overdone. It remains vital both to China and to the country’s trading partners—the adaptor that converts the mainland’s financial and legal voltage into the one used by the rest of the world.
Today’s gloom partly reflects a fear of Chinese autocracy. During Schumpeter’s recent visit, Xi Jinping, China’s president, in town for the 20th anniversary of the resumption of mainland rule, warned that, while the constitutional structure of “one country, two systems” remains intact, Hong Kong must not cross any political “red lines”. Business folk have three worries: that Hong Kong will be usurped by Shanghai; that it can no longer claim to be a pan-Asian hub; and that it is a laggard in technology.
Hong Kong has serious clout. It hosts the world’s fourth-biggest stock exchange and currency market. It is a hub for cross-border loans. About half of China’s outward direct investment flows through it. After 2000 the city’s lawyers, bankers and consultants helped scores of China’s big state-owned firms list shares there. Hundreds of private mainland firms also use Hong Kong to list and as a springboard for foreign expansion. There have been a few scandals—regulators have halted trading in 13 private mainland firms since 2011—but these make up less than 1% of total market capitalisation. The overall quality of supervision is strong.
In 2009 China said that Shanghai would be a global financial centre by 2020 (presumably, displacing Hong Kong). But while its stockmarket is almost as large as Hong Kong’s, economic liberalisation has stalled on the mainland. China’s financial and legal systems are isolated. Foreign banks are all but excluded—they have underwritten just 8% of mainland securities issued so far this year. Mainland financial firms have too little muscle outside China and most have boards that lack international experience.
As well as being cut off, the mainland’s financial system is not trusted by foreigners. The banks are assumed to fudge their figures. Property rights are fluid, as evidenced by crackdowns on tycoons in the past three years. Deng Xiaoping said that some people should be allowed to get rich first. In mainland China under Mr Xi, to be rich is perilous. The result is that few multinationals would domicile a big holding company on the mainland under its opaque laws and tax code. Wall Street’s five biggest banks have cut their total credit exposure to the mainland by 20% since 2014. China wants the yuan to be a more important currency, but its “three steps forwards, two steps back” approach to lifting capital controls gets in the way. The pool of yuan deposits held offshore has fallen by 47% since 2014. All this will hold back Shanghai.
China’s trade and corporate footprint is growing but with regard to finance and law, “it is no longer interested or able to change itself to fit the world”, says a finance firm’s chief. That is why Hong Kong’s role as an adaptor is so important, and one that China appears to accept. Take “stock connect”, a newish link between the Shanghai and Hong Kong exchanges. Instead of a riot of free trading by individuals, buy and sell orders are aggregated by the authorities on both sides of the border, and settled bilaterally once a day. China can keep tabs on mainland investors and it requires them to repatriate the proceeds of share sales, in yuan.
The authorities in Hong Kong want more multinational firms to list in the city, enabling mainland citizens to invest in them, with China’s approval. To attract them, Hong Kong intends to alter its rules to allow firms with dual-share classes (such as Alphabet and Facebook) to list. The change should also attract startups.
What about the second worry, that Hong Kong is no longer a pan-Asian hub? It is true that firms in India and South-East Asia look to its long-standing rival, Singapore. It does not help that Mandarin is challenging English as the language of business in Hong Kong. And China’s “One Belt, One Road” (OBOR) policy to strengthen its regional links is being led by state banks with their headquarters in Beijing, not by Hong Kong institutions (see article). Yet Hong Kong has good regional links. Two of the three biggest global banks in Asia—Citigroup and HSBC—run operations from the city. It is through its arm in Hong Kong that China’s most global bank, Bank of China, is expanding in South-East Asia.
The city has become a pan-Asian life-insurance hub in the past decade, hosting the two large regional competitors, AIA and Prudential as well as FWD, an upstart worth several billion dollars. One of Indonesia’s largest foreign investors, Jardine Matheson, has its headquarters in Hong Kong. As for the OBOR project, private firms doing business will need contracts and financing.
Hong Kong’s true weakness is technology. Singapore has two unicorns—unlisted firms worth over $1bn—Sea, a shopping and online-gaming firm, and Grab, a ride-hailing company. It hosts the Asian headquarters of several big Silicon Valley firms. Of China’s technology giants, only Tencent is listed in Hong Kong. The city could, however, become the laboratory where Chinese and Western financial innovation meet. Ant Financial, China’s fintech giant, is launching its first foreign mobile wallet in Hong Kong. Citi Asia is leading Citi’s charge to win digital customers.
Perhaps China will ignore its own economic interests and rip up Hong Kong’s rule of law. Or perhaps the city’s decline will be more insidious, with its regulators and courts decaying. Still, one of Hong Kong’s biggest problems is its own lack of confidence. For a rock that was made rich by refugees, that is unbecoming.