By Andrew Kemp
Speculation that the city may soon lose its appeal to investment funds appears overblown, given both mainland China and Hong Kong’s strong fundamentals
Talk of Hong Kong losing its role as Asia’s leading financial hub has been gaining traction in recent months, with reports suggesting that investment fund managers might be ready to exit the city.
While investor concern is understandable, given the steady deterioration in Sino-US relations over the last two years, such alarmist talk must be taken with a pinch of salt.
Hong Kong is a world leader in terms of the number of funds based there, including more than 420 hedge funds managing assets worth around $91bn, according to Eurekahedge data.
Moreover, not only does Hong Kong remain the easiest and most compelling way to access the mainland market, the city also stands to benefit from China shaking off the economic effects of the COVID-19 pandemic faster than any other major economy.
Concerns over the city’s economic stability have been brewing since mid-2019, as protests erupted over a proposed extradition bill and the effects of China’s ongoing trade war with the US began taking their toll. In recent months, however, the COVID-19 pandemic and the US’ reaction to mainland China’s new national security law for Hong Kong have dominated global headlines.
With its deep market infrastructure, highly established and liquid markets, and expertise in international finance, Hong Kong is expected to remain strategically important in China’s ‘opening-up’ and integration with the global financial markets.
Vivien Teu, Managing Partner, Vivien Teu & Co
The two governments have been at loggerheads following Washington’s imposition of tariffs on US$34bn worth of Chinese products in mid-2018. The latest front in their geopolitical tug of war has been Hong Kong’s new national security legislation, with the US not only revoking the city’s special trade status but also imposing sanctions on Hong Kong Chief Executive Carrie Lam and several other senior Hong Kong and mainland Chinese officials. Beijing has responded with its own proportional round of sanctions on 11 US citizens.
US President Donald Trump, meanwhile, has ordered US companies to end their business dealings with Chinese media company TikTok.
Yet, while bilateral relations are strained, the reality is that both countries need the other to ensure their own economic prosperity. That is likely why, despite the sabre-rattling between Washington and Beijing, China has pledged to continue implementing the phase one trade deal that it struck with the US in January.
The head of the People’s Bank of China, Yi Gang, has said that not only will his country continue to implement its side of the deal but that Beijing will fulfil promises of financial reform.
“No matter how the international situation changes, the most important thing is to get our own things done and to firmly deepen financial reform and opening-up,” official newswire Xinhua quoted Yi as saying on August 9.
Hong Kong will continue to have a key role in this reform process, according to Vivien Teu, the founding and managing partner of Hong Kong law firm Vivien Teu & Co. – a diverse legal practice with a focus on investment funds and financial services. She said: “With its deep market infrastructure, highly established and liquid markets, and expertise in international finance, Hong Kong is expected to remain strategically important in China’s ‘opening-up’ and integration with the global financial markets.”
Indeed, while investors may be worried about the troubled dynamic between the world’s two largest economies and the uncertainty caused by COVID-19, there are signs of confidence in the fundamentals that underpin the city’s status as a financial hub.
A Hong Kong Investment Funds Association (HKIFA) survey in May found that 71% of retail investors intended to invest in Hong Kong stocks and 53% in retail funds within the next 12 months.
This sentiment was confirmed by global funds network Calastone’s survey in August, which found that 58% of Hong Kong respondents had made new investments since the start of the COVID-19 pandemic. It also noted that 41% of the city’s investors were actively seeking to capitalise on market volatility caused by the health crisis.
With COVID-19 slowly becoming part of the global backdrop, investors are adapting and looking for new opportunities. While the pandemic dominates global headlines, Beijing’s troubled relationship with Washington has weighed on investor minds.
In HKIFA’s survey, 63% of respondents said their investment decisions would be influenced by Sino-US relations, followed by COVID-19 at 60% and trade tensions at 48%.
However, certain market fundamentals suggest Hong Kong is in a stronger position to weather the geopolitical downturn.
First of all, the Chinese economy is recovering more quickly from the pandemic than the US, which is still struggling to rein in the contagion.
China’s GDP grew by 3.2% year on year in the second quarter, after contracting by 6.8% in the first three months of 2020. The US economy, meanwhile, shrank by 32.9% year on year in the second quarter and by 5% in the January-March period.
Secondly, Hong Kong is set to play a central role in financing Beijing’s Greater Bay Area (GBA) development and the Belt and Road Initiative (BRI). In 2018, the city handled 54.1% of China’s utilised capital inflow and 55.5% of its foreign direct investment (FDI) outflow, according to National Bureau of Statistics (NBS) data. That figure is only set to rise as Beijing transforms southern China into a megalopolis while building trade routes to increase the flow of goods to and from the rest of the world.
Finally, before the US decided to challenge Beijing’s authority in Hong Kong, general investor sentiment over the city’s mid-term prospects was upbeat.
Prior to the unveiling of Hong Kong’s new national security legislation in May, HKIFA and international accounting firm KPMG conducted a survey that found 53% of fund managers expected growth of 11-30% in their total assets under management (AUM) by 2025. Moreover, respondents said the main growth drivers would be the opening up of mainland China’s asset management industry, the ongoing development of the GBA, technology-driven change and environmental, social and governance (ESG) investing.
Teu said: “China’s GBA plans aim to leverage Hong Kong’s status as a key international financial centre and offshore Renminbi hub, and as an international asset management centre. As these plans develop, the city’s position as a key international financial centre is expected to be further consolidated.”
Reasons to invest
Beyond the benefits of being tied into mainland Chinese programmes such as the GBA and the BRI, Hong Kong has unveiled new legislation aimed at attracting private equity, real estate and venture capital funds.
China’s GBA plans aim to leverage Hong Kong’s status as a key international financial centre and offshore Renminbi hub, and as an international asset management centre. As these plans develop, the city’s position as a key international financial centre is expected to be further consolidated.
The Legislative Council (LegCo) passed on July 9 the new Limited Partnership Fund Bill, which provides an alternative investment vehicle for private fund managers. The new opt-in registration scheme, which is administered by Companies Registry and comes into effect from August 31, will exempt limited partnership funds that meet relevant conditions from having to pay profits tax or stamp duty. The expected tax concession on manager’s carried interest should also boost the attraction of the city’s limited partnership structure.
Hong Kong is the nexus through which the bulk of mainland China’s financial inflow and outflow travel , meaning a strong mainland economy will help to drive corresponding growth in Hong Kong. Commenting on this financial relationship, Teu said: “Hong Kong is already home to one of the top three global markets for initial public offerings [IPOs], and US-China tensions have resulted in more Chinese companies choosing to return to or list in Hong Kong.”
Given that the mainland economy is emerging from the pandemic’s shadow, and Hong Kong enjoys a level of financial freedom not seen in any of its mainland rivals, deteriorating political relations may unnerve investors but forcing them to relocate entirely seems a somewhat overly pessimistic prediction.
This article was written by Andrew Kemp for Conventus Law in association with Vivien Teu & Co.
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