Year of the Rat reflections: HK’s financial appeal and the Brexit deal
At the beginning of every Chinese New Year, AsianInvestor makes 10 predictions about economic, political and financial developments that are likely to have an impact on the way institutional investors allocate their funds. And then, one year later, we revisit these forecasts to see how well we did.
Our final, ninth and tenth Year of the Rat predictions looked at whether Hong Kong's status as a leading financial centre would be damaged by the growing influence of China in the city's politics, and also asked if the UK government would manage to finalise a Brexit trade deal with the European Union before the transition period ended, on December 31, 2020.
Will Hong Kong still shine as an international financial centre?
Answer: Yes
Verdict: correct
In 2020 Beijing effectively abandoned any pretence of remaining committed to 'One Country, Two Systems'. By introducing the national security law on June 30 over the head of Hong Kong's legislative council, the Chinese government sent the message that it would not tolerate any vocal opposition to its rule.
The new law contains ill-defined but wide-ranging clauses over what constitutes a threat to national security. The government of chief executive Carrie Lam has used them to crush dissenting voices, largely via arrests. Targets have included opposition politicians and Jimmy Lai, the founder and chairman of opinionated and pro-democracy tabloid Apple Daily. The Hong Kong government is gradually outlawing political dissent and criticism in the public arena.
However, we were correct in our prediction that Hong Kong's financial centre status could endure this increasingly heavy hand. China, and its local political proxies, have thus far largely avoided interfering in Hong Kong's business and finance. That has allowed capital-raisers and investors to operate largely as normal.
Hong Kong was also close to the source of Covid-19, but the city's experience as ground zero for the Sars disease of 2003 proved invaluable. While the government's response was haphazard, with test-and-trace almost non-existent at first, Hong Kong citizens quickly adopted masks and socially distanced to limit the spread of the disease.
That left it well placed to benefit as China's economy quickly bounced back, after it suppressed the spread of Covid-19 from its initial spread in Wuhan. Combined with government stimulus efforts this encouraged international investment flows towards the country, often via Hong Kong-listed stocks.
As Hong Kong Monetary Authority chief executive Eddie Yue noted on his blog on February 8, banking deposits in Hong Kong grew in 2019 and 2020, rising by a particularly noteworthy 5.4% last year. Plus, he said the number of asset managers in Hong Kong rose by 3.9%, from 1,808 at the end of 2019 to 1,878 a year later.
For now, Hong Kong's financial status remains strong. Whether it will remain so is harder to predict. The city is a vital financial conduit for international capital, which China sorely needs, but the government of Xi Jinping appears increasingly intolerant of any forms of public resistance or disagreement.
Hong Kong's lasting financial strength may depend on just how much Beijing wants to continue tightening its control of the city.
Will the UK reach a trade deal with the European Union this year?
Answer: Yes (a very basic one, accompanied by an extension of the transition period)
Verdict: Correct (mostly)
Brexit has become one of the unescapable issues of British politics, no matter how much the country's public wish it would disappear.
After the UK government of Boris Johnson officially withdrew from the European Union on January 31, the country had until the end of the year to strike a trade agreement with the economic bloc. But instead of engaging discussions in good faith it swiftly embarked on a series of belligerent and increasingly bad faith positions on what it wanted from the agreement.
Even as Covid-19 hammered the UK economy, Johnson refused to even consider the extension to the transition period that we had predicted, seemingly deciding that a cliff-edge approach was needed to deliver a trade deal of some description.
The EU, for its part, grew increasingly irritated with the chest-thumping antics of its troublesome former member, and it had the political and economic interests of its remaining 27 members to consider. Negotiations dragged on for months, with neither side wanting to be blamed for walking away, yet very little progress being made.
In September the UK's House of Commons passed legislation that would let the Conservative government breach the very Withdrawal Agreement it had successfully campaigned on signing in the December 2019 election - an act of breaktaking political cynicism. Johnson and his cronies had little seemingly little concern about the damage this gambit would do to the UK's reputation as a reliable partner.
As December arrived, and with a no-deal looking likely, the European and UK sides threw themselves into a flurry of last-minute discussions. That led to a post-Brexit trade deal finally being signed on December 30 that ensured tariffs would not be enacted between the two.
Johnson's government employed typical hyperbole, declaring the result a victory. In reality the agreement applied new checks to both sides, hurting companies in both the UK and EU that rely on customers or production chains based in the other. However, it is likely to leave the UK in a weaker position given its dependence on services, which are not explicitly covered by the agreement and will thus be vulnerable to non-tariff barriers.
Still, the skinny deal was seen as a good thing by markets that had become unnerved by the prospect of no-deal. The sterling avoided losing more value.
However, in the weeks since the transition period lapsed UK companies have discovered the true cost of 'taking back control'. British newspapers contain stories of company CEOs (especially in the fisheries industry that the UK government was supposedly so keen to protect) bemoaning the delays and labyrinthine bureaucracy that now comes with sending goods to EU customers.
It's early days, but unless these issues get resolved they could become very bad news for a country still in recession and struggling with a hefty Covid-19 infection rate. On the bright side, it can at least point to a genuinely impressive rollout of vaccines.
As the costs continue to mount, the need to renegotiate parts of the trade deal will also grow. However, the EU is likely to be reluctant to re-enter new discussions following the UK's previous tactics, and they could take years to conclude.
Brexit looks set to remain part of the British political lexicon for a long time to come.