Hong Kong’s stock market, now focussed on the shares of Chinese companies, has been reeling under the pressure of Beijing’s regulatory campaigns and geopolitical tensions with the US. The Hang Seng Index was Asia’s worst performer last year, generating negative returns for investors for the fourth year in a row.
Meanwhile, Hong Kong’s property prices are down almost 25% from their 2019 peak, according to local agency, Centaline. Most analysts expect the market to decline further until the US Federal Reserve starts to cut interest rates.
International investors continue to be overwhelmed by the negative headlines coming out of Hong Kong: the latest focus is the proposal for a new security law unveiled last week to close what city officials see as “loopholes” in existing legislation.
Yet it is important that investors not lose sight of Hong Kong’s continuing importance as a global financial centre.
For one thing, it is the largest clearing centre in the world for the yuan outside of mainland China. The city processes over 70% of cross-border yuan payments, far ahead of second-place London’s 5% share.
This is significant given that last year the yuan overtook the yen to become the fourth-most-widely used currency for cross-border payments, according to the Society for Worldwide Interbank Financial Telecommunication (SWIFT). With China’s share of global trade reaching almost 20%, it would be safe to bet that the yuan’s share will keep rising in the years ahead.
Around two-thirds of direct foreign investment heading into or out of mainland China also goes through Hong Kong. As globalisation takes more of a regional cast and companies seek to bolster the resilience of their supply chains following the tumult of the Covid pandemic and the US-China trade war, the amount of investment that could flow through Hong Kong into other low-cost manufacturing hubs can be expected to increase. This should generate opportunities for both local and global companies.
Greater international interest in the yuan will also be a positive for Hong Kong’s stock market, which has been promoting yuan-denominated listings as well as its Stock Connect programme, through which overseas investors can buy and sell domestic Chinese shares.
The “Big Four” accounting firms, which are heavily involved in preparing companies to go public, are all forecasting that initial public offerings will rebound strongly in Hong Kong in 2024, up from last year’s meagre levels, likely generating over USD 10 billion in proceeds and making the city once again a leading global IPO market.
The firms each pointed to looser exchange rules for IPOs by technology companies in areas such as semiconductors and artificial intelligence, new links with Middle Eastern and Southeast Asian markets that could facilitate secondary listings, and geopolitical considerations and growing obstacles to listing domestically that could send more Chinese companies Hong Kong’s way.
Away from the stock market, Chinese companies’ predominance is not so strong in Hong Kong.
According to government figures, 2,100 mainland companies have a presence in the city as against 1,400 Japanese companies and 1,200 US companies. Similarly, in terms of regional headquarters, 247 Chinese companies have hubs here, compared with 214 US companies and 206 Japanese companies. This shows that the city remains a global business centre, not merely a Chinese one. This is reflected in terms of the skilled workers the city needs and is attracting.
It is also apparent in terms of the fund management industry, where there are signs that Hong Kong could overtake Switzerland as the world’s largest cross-border private wealth management centre by 2027.
The city remains home to an unusually large concentration of international fund managers, advisory businesses and private banks. Despite talk of outflows to Singapore, Hong Kong remains well ahead of the Southeast Asian city-state, with some USD 2.2 trillion in assets under management compared with USD 1.5 trillion for its regional rival. Hong Kong was home to around 2,000 licensed asset managers last year as against 1,194 in Singapore, according to official data.
Going forward, the Greater Bay Area – a multifaceted initiative to more closely integrate Hong Kong and Macao with nine cities in China’s neighbouring Guangdong province – provides another key reason for investors to keep a foothold in Hong Kong.
Improving transport links and ease of travel are expected to propel a doubling of the gross domestic product of the Greater Bay Area by 2030, notwithstanding China’s slowing overall growth momentum. The Greater Bay Area already accounts for more than a third of China’s exports, and average incomes are significantly above the country’s average.
Talk in Washington of imposing new sanctions on Hong Kong, removing the city’s special trade status, or even kicking it out of the system for handling US dollar payments are certainly not helping global investor sentiment. Such headwinds may indeed blow harder as the US presidential and congressional campaign season intensifies.
However, writing off Hong Kong entirely would be a mistake. A declining presence in the city will only diminish US interests in the region and cause American companies to miss out on opportunities that new developments like the Greater Bay Area can offer. Cutting Hong Kong off from the US dollar would permanently risk destroying a substantial amount of dollar demand and undermine US economic power.
It would be far better for US companies and investors, and their counterparts in other countries, to recognise that Hong Kong remains an essential player in global finance. The city may have taken a beating in recent years, but it remains in a leading position.
Carlos Casanova