While life for ordinary Hong Kongers is anything but secure amid 2020's many unwelcome developments, the risks of the newly enforced National Security Law (NSL) will not unduly affect the territory's financial services sector, say local players.

As AsianInvestor reported yesterday (July 20), the territory is coming under renewed competitive pressure from other business hubs in Asia Pacific, who see an opportunity to win business as a result of China’s increasingly authoritarian rule.

The idea of international financial groups pulling out of Hong Kong because of the NSL is a sensitive issue, especially for those who have substantial business interests in China. Certainly, none of the big players have indicated any intention of shifting. Some executives were at least willing to talk to AsianInvestor on the topic, though most did so anonymously.

While rival financial centres such Singapore, Tokyo, Sydney and Seoul suggest Hong Kong's credibility has been fatally damaged, the view from the city is that this is another example of people writing off Hong Kong prematurely, as they did in the run-up to the handover from the UK to China in 1997.

The political rules may have changed in 2020, but local industry experts say the simple fact is that foreign financial services firms need a base in Hong Kong if they want to be in China.

One senior fund industry executive told AsianInvestor: “As much as we all want free expression, the reality is we are dealing with China. If the big American firms want to be in China, they know they have to adopt different standards. They’ll do the same for Hong Kong.”

CHINA'S DEREGULATION

Financial services firms recognise that any concerns they have about Hong Kong’s future have to take account of the opportunities and weigh the risks of Hong Kong’s political freedoms against that.

A senior bank executive, with experience across the region, told AsianInvestor: “When China is going through so much deregulation – where foreign firms can have 100% ownership of banking, broking, fund and insurance subsidiaries – will they let what’s happening in Hong Kong get in the way of their China ambitions?”

This pragmatic approach may not sit well with people campaigning for greater democracy and those protesting against increasingly brutal policing in Hong Kong, but it’s the harsh reality at this point in the game.

Hong Kong hasn’t yet become China, and one positive aspect amid all the current negativity is that local executives think it is still safer being based in Hong Kong than being onshore in mainland China. Not least because it retains the English common law system and a depth of international talent across banking, accounting, fund management and legal services that is unmatched in any other Asian city.

As a specialist private equity fund manager told AsianInvestor: “Look at all the deal flow in Hong Kong. It has at least 50% of the PE deals, special situations and private credit. You’ve got all the Greater Bay Area activity that is only going to grow further. This is all happening on Hong Kong’s doorstep, not in Singapore.”

THE HKMA'S PERSPECTIVE

There is also a view that it remains to be seen what effect the new National Security Law will have on businesses in Hong Kong.

A spokesperson for the Hong Kong Monetary Authority told AsianInvestor, “The National Security Law has not brought any changes to the fundamentals of our monetary and financial system. There has not been any noticeable sign of fund outflow, either from the Hong Kong dollar or the banking system.”

Stock markets have been active and orderly, with a series of recent IPO activities attracting strong market interest, said the HKMA spokesperson. “Many US-listed Chinese mainland companies have come to Hong Kong for a secondary listing this year.”

For Greater China financial markets, both public and private, Hong Kong seems likely to remain the natural hub of activity, according to Robert Woll, a partner at Hong Kong law firm Mayer Brown.

"For example, HKEX (Hong Kong's stock and derivatives exchange) is likely to remain the primary listing venue for PRC (People's Republic of China) issuers, and PRC market liberalisation and market access products are likely to be tailored for firms operating in and from Hong Kong."

Indeed, Hong Kong continues to be the preferred platform for international investors into China.  Stock Connect now accounts for around 70% of all ‘A’ shares holdings by overseas investors, while the Bond Connect scheme accounts for over half of the onshore RMB Bonds turnover in China's Interbank Bond Market, according to official figures.   

The June 29 announcement of Wealth Management Connect between the People's Bank of China, the HKMA and the Monetary Authority of Macao is seen as another step towards closer financial cooperation in the Greater Bay Area. The HKMA suggests this will further strengthen Hong Kong's role as the international gateway for capital flowing into and out of the mainland.