Every Chinese New Year, AsianInvestor makes 10 predictions about developments that will affect global financial markets and the portfolios of Asian investors, especially asset owners. These developments can focus on asset classes, geopolitical events, or structural issues surrounding particular markets.
In this Year of the Rat outlook, we gauge Hong Kong’s status as an international financial centre.
Will Hong Kong still shine as an international financial centre?
Hong Kong’s seven-month long protest grabbed global headlines for much of last year. The disruption that resulted led two credit rating agencies to cut their ratings on the city and prompted many market participants to reconsider its status as an international financial centre.
The protests against the Hong Kong government’s proposed extradition bill, which allows the mainland government to extradite fugitives to mainland China, exposed local people’s deep distrust of Beijing. And the inability of the local administration to negotiate any end to the protests underlined its incompetence.
In view of the structural weaknesses the protests revealed and the economic damage they wrought, Fitch cut Hong Kong’s long-term foreign-currency-issuer default rating to AA from AA+ on September 6. Then last month Moody's lowered the long-term issuer and senior unsecured ratings of the Hong Kong government by one notch to Aa3 from Aa2 last month.
"The absence of tangible plans to address either the political or economic and social concerns of the Hong Kong population that have come to the fore in the past nine months may reflect weaker inherent institutional capacity than Moody's had previously assessed. It may also point to more significant constraints on the autonomy of the special administrative region's institutions than previously thought," the rating agency said on January 20, explaining the reason for the drop.
Effective and impartial rule of law is essential to an international financial centre, and Hong Kong’s has been found wanting. That’s raised concerns that the city is losing its independence and global standards, and will soon be just like any other city in China.
Yet despite rising scepticism, market experts that AsianInvestor spoke to generally believe Hong Kong will remain an international financial centre for the coming year – provided it doesn’t start passing draconian laws seen as originating from Beijing’s preferences.
“Hong Kong would indeed lose its status as an international financial centre if the anti-extradition law was passed,” an official at a capital market organisation told AsianInvestor. Doing so would deal a severe blow to investor confidence and hurt freedom of expression, he added.
Hong Kong’s breadth of financial expertise continues to stand above what is available in the Chinese financial centres of Shanghai and Shenzhen
Such bold steps appear unlikely, at least in the short to medium-term. China needs Hong Kong to help raise offshore funds for its corporates, and the city’s breadth of financial expertise continues to stand above what is available in the Chinese financial centres of Shanghai and Shenzhen. Hong Kong stock market remains the preferred access point for China equities and this status is unlikely to change for years to come.
In fact, Hong Kong’s status was a financing centre was underlined last year, despite the chaos it endured. It was the world’s top fundraising hub, with total funds raised of HK$315.5 billion ($40.65 billion), according to KPMG. The city also boasted a historical high of 145 new main board stock listings in 2019, up from 130 in 2018.
The fundraising total was largely driven by a strong performance in the second half of the year, highlighted by two mega-sized deals: the secondary listing of technology giant Alibaba and the listing of Budweiser Brewing, a US beverage maker best known for its eponymously named beer.
While Hong Kong’s prestige as an international centre was somewhat tarnished last year, it’s worth noting that international investors are still far more leery of China’s credentials. Their concerns extend across the country’s legal system, capital controls and the limited convertibility of the renminbi, as well as its relative lack of transparency and inconsistent regulatory enforcement.
That said, Hong Kong’s appeal a hub for ultra-high-net worth is declining. Some of the wealthy people living in the city decided to shift assets as the protests worsened. US investment bank Goldman Sachs estimated that up to $4 billion in local currency deposits flowed to Singapore as of August.
Still, as long as China needs Hong Kong’s financial clout, Beijing looks set to ensure that its tightening grip is confined mostly to political dimensions, and avoids the free flow of capital or financial regulatory standards. It doesn’t want to throttle the city that supplies so much capital to its companies.