By Johnny Patterson
As protests blew up on the streets of Hong Kong last summer, the eyes of the world looked to a city which is too easily neglected. And when tanks amassed in Shenzhen, fears of a “Tiananmen Massacre 2.0” gripped onlookers. The threat to the city’s unique status was clear.
Op-ed columnists painted a David and Goliath story – Hong Kong’s helpless young people facing up to the might of Beijing – umbrellas versus tanks – a courageous, but ultimately futile fight.
The assumption underlying this narrative is that the fate of the city, once of paramount importance, is now at best a secondary issue to Beijing. Hong Kong had once made up 20 per cent of China’s GDP. Today, that figure is close to 2 per cent. The New York Times published one op-ed with the headline ‘Why China No Longer needs Hong Kong’, the Financial Times ran a story titled ‘Hong Kong’s not so special status’. If the city was now expendable, the columnists claimed there is nothing to stop the tanks rolling through or Beijing sacrificing Hong Kong for the sake of security.
The reality is not that simple. Rumours of Hong Kong’s decline are greatly exaggerated.
While, yes, the city’s share of China’s GDP has gone down considerably following 20 years of unprecedented economic growth in the mainland, the city remains a vital umbilical cord, carrying foreign capital into China and giving international firms a springboard into the mainland.
Hong Kong’s international importance remains the city’s greatest protector, and the greatest incentive for Beijing to compromise. The economist George Magnus recently described Hong Kong as ‘China’s financial window on the world, and the world’s financial window on China.’ In a new report, published this week, Hong Kong Watch laid out evidence for this, finding that Hong Kong is an essential source of capital for corporate China; has a crucial role in opening up global markets for Chinese firms; and remains the pre-eminent Asia Pacific hub for international firms.
Chinese firms rely heavily on Hong Kong as a key source of foreign funding. The city is home to the largest number of initial public offerings by Chinese mainland firms by a considerable margin – with 73% of IPOs taking place in Hong Kong between 2010 and 2018. The Hong Kong Shanghai Stock Connect scheme is increasingly the preferred means by which Western investors access the mainland stock market, and Hong Kong is the largest offshore centre for bond sales by Chinese companies: Around 60 per cent of US Dollar-denominated bonds issued by Chinese companies were listed in Hong Kong between 2017 and 2019.
Hong Kong is not only a key source of capital for Chinese firms, it provides a springboard for mainland businesses trying to access global markets. Hong Kong mediates nearly two-thirds of direct investment into and out of China. The system is trusted, and investment from Hong Kong is considered more reliable as a result of the due diligence process and the legal system. Hong Kong outstrips any other international financial centre in terms of lending and deposits from China.
Hong Kong also remains a critical hub in the Asia Pacific regional firms. 1530 multinationals have their regional headquarters in Hong Kong, which is an increase of two-thirds since 1997, and the city is the UK’s second-largest trading partner.
The publication of HSBC’s accounts last week illustrates the point. HSBC’s business in Hong Kong makes up the bulk of its global profits before tax and the recent announcement of losses in Europe and North America will only make HSBC more reliant on Hong Kong as a stable financial base. Given that HSBC is not only one of the largest employers in the City of London but pays a substantial amount to the UK Treasury each year in tax – British politicians cannot be complacent about the impact that the unravelling of Hong Kong would have.
Why does Hong Kong remain important? The city’s history gives it an advantage. Hong Kong’s financial professionals have decades of experience sitting at the apex between China and the rest of the world, and therefore have expertise and knowledge of markets that give the city a huge comparative advantage.
However, Hong Kong retains its status for a range of other reasons. We spoke with a range of business leaders who underlined that the city has a number of unique qualities which set it apart as a mediator of capital flows and an international financial centre. Four stand out: freedom of capital, freedom of information, rule of law, and autonomy.
The Hong Kong government has made deregulation and free movement of capital a priority. The Heritage Foundation has, as a result of the Hong Kong government’s policies and its separate WTO status, repeatedly described Hong Kong as the world’s ‘freest economy.’
All participants in the Hong Kong stock exchange and financial markets have access to transparent and accurate information. Again, its autonomy from mainland China facilitates this. Hong Kong is not within the ‘Great Firewall of China’, and many leading news organisations base their Asia Pacific Headquarters in the territory.
Another advantage for Hong Kong is its common law system, which aside from being both highly respected and reliable also shares synergies with other key financial hubs such as Singapore and London as a result of the common-law link and the presence of international judges. This ensures that contracts are reliable and easier to sign with other key jurisdictions.
Finally, the combination of autonomy and the rule of law continues to mean that Hong Kong is treated qualitatively differently to other mainland cities by the United States and other international governments. Through the US Hong Kong Policy Act, the US Congress makes the US-Hong Kong relationship contingent on the city remaining autonomous and the one-country, two-systems principle retaining its integrity.
Shanghai, Shenzhen and Beijing will not be able to replicate Hong Kong unless there is serious liberalisation on the mainland. All of these are increasingly important as financial centres – but they primarily serve the domestic economy – none can compete with Hong Kong as a conduit for foreign capital. The relationship between Shanghai, Beijing, Shenzhen and Hong Kong is complementary, not primarily one of competition. They carry different strengths and varying benefits to the mainland.
No other Chinese city can take Hong Kong’s place in the short run. And with China’s current account surplus diminishing, the need for inflows of capital is only increasing. Strategic rivalry with the US means that Western capitals are no longer guaranteed to be reliable alternatives. Singapore might be able to take on some of the functions of Hong Kong in the long run, but its stock market capitalisation is not in the same league and its business culture is starkly different. Alibaba’s decision to list in Hong Kong when unrest was at its height on the streets reflects the fact that there is no immediate replacement.
NEW REPORT: ‘Why Hong Kong matters: understanding the importance of the city to China and the world.’
It shows China still relies on Hong Kong as a financial centre & explains why.
Insight 1: IPO figures show HK is a key capital source. (Thread)
— Hong Kong Watch (@hk_watch) February 26, 2020
As debates about Hong Kong’s future continue, the importance of the city must not be underestimated. Beijing cannot afford to lose Hong Kong as its gateway to the world: preserving Hong Kong’s unique qualities must remain a priority.