How important is Hong Kong to China as a free finance hub?

- Advertisement -
- Advertisement -
- Advertisement -
- Advertisement -

Bankers and investors fear China’s push to impose national security laws on Hong Kong threaten the city’s future as an international financial centre. If it gets to that stage, Beijing’s move will come at a cost for China’s economy.

WHY DOES CHINA NEED HONG KONG AS IT IS?

China still has extensive capital controls and often intervenes in its financial markets and banking system. Hong Kong is one of the world’s most open economies and one of the biggest channels for equity and debt financing.

The size of Hong Kong’s economy may only be the equivalent of 2.7% of mainland China’s, down from 18.4% in 1997 when it reverted to Chinese rule, but the territory punches above its weight due to world-class financial and legal systems.

As a gateway between China and the West, Hong Kong attracts global capital for China more efficiently than its other cities.

 

HOW IS THAT CHANGING?

Under the ‘one country, two systems’ formula agreed as part of Britain’s handover of the territory to China, Hong Kong is guaranteed liberties unavailable on the mainland such as freedom of expression and an independent judiciary.

These freedoms give Hong Kong a special international status — for instance, it does not have to pay the U.S. tariffs currently hitting Chinese imports.

With the U.S. State Department recommending the removal of that status as it no longer deems Hong Kong sufficiently autonomous from Beijing, measures hitting trade, finance and investments among other areas could follow.

Australia, Britain, Canada, the European Union and others also have expressed concerns over the legislation.

 

WHAT IS AT STAKE?

China uses Hong Kong’s currency, equity and debt markets to attract foreign funds, while international companies use Hong Kong as a launchpad to expand into the mainland.

While China has reformed its markets over the years, over 60% of foreign direct investment (FDI) into and out of China continued to be channeled through Hong Kong as of 2018, according to Morgan Stanley.

Last year, Chinese companies raised $73.8 billion via initial public offerings (IPOs), $35 billion of which was bagged in Hong Kong, according to data from Dealogic.

Chinese businesses tapped Hong Kong’s debt market for 25% of their $131.8 billion in offshore U.S. dollar funding last year, Refinitiv data shows.

Schemes linking stock exchanges in Hong Kong, Shanghai and Shenzhen provide the main gateway for foreigners to buy mainland stocks. A planned opening up of Chinese capital flows only increases the importance of these channels, and ultimately, Hong Kong, Fidelity said in a post this week.

Chinese banks hold more assets in Hong Kong — $1.1 trillion in 2019 — than lenders from any other region, according to Hong Kong Monetary Authority’s data compiled by Natixis. Any squeeze on the massive financing channel risks destabilising the Chinese economy.

Among other deep linkages, Hong Kong’s port continues to handle some of China’s exports and imports, though it has been eclipsed by big Chinese ports in the last few decades.

Hong Kong has also been pivotal to China’s ambition to turn the yuan into a widely-used international currency, competing with the U.S. dollar and increasing its global influence.

HOW COULD IT ALL UNRAVEL?

The pandemic has prompted central banks around the world to flood markets with new liquidity. Money that would normally seek a home in Hong Kong may just choose other centres, such as Singapore, in time diminishing the city’s significance.

Capital already in Hong Kong could also choose to move outside the scope of mainland legislation and escape disruptions from local social unrest and any international restrictions. Outflows so far have been limited, bankers said.

This article was originally published on finance.yahoo.com/finance/.

Home of Science
Follow me

- Advertisement -

Discover

Sponsor

Latest

Scientists discover that abundant minerals are proton conductors

A group of researchers from the University of Manchester has discovered that mica's, a group of phyllosilicate minerals that are characterized by a certain...

Model cited by White House says 82,000 people could die from coronavirus by August, even with social distancing

President Donald Trump's decision to extend social distancing guidelines until April 30 came after officials reviewed 12 different statistical models, said Dr. Deborah Birx,...

Digital Strategist Chris Diaz: Helps entrepreneurs and businesses get the attention they deserve online.

He shares productivity tips On How to Stay Afloat amid the COVID 19 crisis Make Fear Your Friend: Do you know where the richest place in...

Prepping portfolios for next market storm? Not just gold and govvies

G7 government bonds? Check. Gold? Check. But that may not be enough as the coronavirus crisis accelerates a hunt for a wider pool of...

Billie Eilish in “Straight Up Movie”

When I was given the opportunity to see Billie Eilish in person, I was surprised by the size of the venue and the fact...
Home of Science
Follow me