Updated: May 21
By Andrew Kemp
Reports that Hong Kong’s recent trials will permanently dethrone the city as Asia’s financial hub may be overplayed
To say that Hong Kong has endured a challenging year would be an understatement. But while the city continues to face certain struggles and uncertainty, its ability to continue serving as Asia’s pre-eminent financial hub should not be discounted.
The mainland government’s introduction of a new national security law has dominated headlines over the last few months, with speculation mounting over its long-term economic impact. US President Donald Trump’s move to end preferential trade treatment for the city, coupled with new US sanctions targeting individuals Washington believes have undermined Hong Kong’s autonomy, has only serve to muddy the waters further.
Predictions abound that the Hong Kong economy will enter a tailspin and the city will be permanently dethroned as a business mecca. These predictions ignore two major issues, however, irrespective of ideological stance.
While the national security legislation has outraged foreign politicians, it may not alienate business in the long run. Business benefits from order and the status quo, both of which have been challenged by recent protests.
Moreover, the Hong Kong economy has slowly come to be overshadowed by the mainland Chinese economy, with Chinese companies investing heavily in the city. Continuing economic success for the mainland bodes well for the city’s future.
The coronavirus (COVID-19) pandemic has hurt Hong Kong’s economic growth deeply, driving an 8.9% contraction in first-quarter GDP.
Many business owners around the world like to list their business in Hong Kong because there is a strong investor base and a high premium attached to a listing status. These investors choose to invest in Hong Kong because of its simple and low tax regime and free flow of capital.
Kurt Lau, Partner, Hill Dickinson, Hong Kong
COVID-19 struck when the economy was already in a downturn, however. Hong Kong posted a 2.8% and 2.9% economic contraction in the third and fourth quarters of 2019 respectively, contributing to a 1.2% slide in last year’s GDP.
While some of 2019’s decline can be attributed to the Sino-US trade war, protests that started in response to a proposed extradition bill before morphing into a wider prodemocracy movement, hurt the economy more. Peaceful demonstrations frequently morphed into violent clashes with police, creating a siege mentality within the city.
The pandemic brought a halt to much of this, owing to social quarantine efforts, but it also triggered a global economic freefall. The prospect that protests would resume as soon as social distancing measures eased, amid projections that the global recession would be the worst since the Great Depression, troubled the Hong Kong and mainland authorities.
To head off a repeat of 2019’s unrest, which the Hong Kong government failed to contain, Beijing announced its new security legislation in May and introduced it on June 30. In response, US President Trump then signed on July 14 both an executive order ending the city’s preferential trade treatment as well as the Hong Kong Autonomy Act, which opened the door to the aforementioned sanctions.
“Hong Kong will now be treated the same as mainland China,” he said during a White House press conference. “No special privileges, no special economic treatment, and no export of sensitive technologies.”
Sanctions, meanwhile, have since been imposed on Hong Kong Chief Executive Carrie Lam and 10 other senior officials both in the city as well as on the mainland. Following through on its mid-July warning that it would respond in kind, Beijing introduced sanctions targeting 11 US citizens on August 11, including lawmakers such as Senators Ted Cruz and Marco Rubio.
The details of Hong Kong’s national security law remain vague and open to broad interpretation, prompting arguments that it could be applied to activities beyond protests.
The legislation criminalises secession, subversion, terrorism and collusion with foreign forces, which carry penalties of up to life in prison. It also allows political bodies to appoint judges to cases deemed as relating to national security. Critics have argued that if the law can be applied broadly, then foreign investors have a case for exiting the territory.
However, such an argument also ignores certain market realities. While the Beijing government has long wanted a direct hand in Hong Kong’s security, there is little upside in turning the city into another Shanghai. While the mainland Chinese financial hub has grown impressively in recent years, strict financial controls prevent Shanghai from challenging Hong Kong’s role as an offshore money centre.
Indeed, international credit rating agency Standard & Poor’s affirmed Hong Kong’s credit rating at the end of June, noting that the biggest challenges facing the city’s economy were not the national security law but rather the pandemic’s prolonged downward pressure on the services and trade sectors. This is a sentiment reflected by the city government, which has warned that a contraction of 4-7% is likely for 2020.
S&P maintained its stable outlook for the city and said it reflected its expectation that “institutional changes as a result of the impending national security legislation will not affect Hong Kong’s autonomy in setting economic policies as laid out in the Basic Law”.
The ratings agency noted that the city’s ability to set its own macroeconomic, financial and trade policies affected its creditworthiness and, as such, the Beijing government was expected “to maintain Hong Kong’s autonomy in these matters, as outlined in the Basic Law”.
Hong Kong allows Chinese companies easier access to overseas investment than via rival mainland markets, acting as a financial gateway to the larger Chinese economy.
Hong Kong is also the only common law jurisdiction within China with well-established case law, which is respected globally by the international business community and international investors. The city’s special reciprocal arrangement with mainland China makes it an ideal location for the resolution of BRI-related disputes.
Bryan O'Hare, Partner, Hill Dickinson, Hong Kong
Chinese companies have been increasingly seeking foreign funding through the city in recent years, owing to the US’ increasingly adversarial attitude to mainland investors. This has allowed Hong Kong to claim the global top spot in terms of initial public offerings (IPOs) in seven of the last 11 years, including in 2019.
Mainland e-commerce giant JD.com, for example, recently raised $3.9bn on Hong Kong’s stock exchange, while online gaming company NetEase raised $2.7bn.
Kurt Lau, a partner at Hill Dickinson Hong Kong, said the city’s stock exchange would remain a top fund-raising venue owing to its strong fundamentals. He said: “Many business owners around the world like to list their business in Hong Kong because there is a strong investor base and a high premium attached to a listing status. These investors choose to invest in Hong Kong because of its simple and low tax regime and free flow of capital.”
Yang Kang Chan, a fellow partner in the law firm’s Hong Kong office, echoed that sentiment, saying: “It is unclear what Trump has in mind for Hong Kong, however, businesses looking to raise funds will continue to go to where they can get a reasonable return.”
Chan added that in terms of the COVID-19 crisis many investors in the capital markets had embraced remote working, including conducting due diligence exercises and drafting meetings. While those that had been slower to embrace these new methods have opted simply to put their deals on hold, Chan said: “We are definitely bullish on the capital market deals coming out of Hong Kong once some sort of normalcy returns from the COVID-19 pandemic and, perhaps even more so, after the US election in November 2020.”
Lau agreed that while Sino-US tensions and the health crisis would dampen market sentiment in the short term, “once travel restrictions are lifted, there will be another surge in IPO activity because most transactions in Hong Kong are cross-border in nature.”
Chinese companies have come to dominate the city’s economic landscape and that is a trend only likely to continue amidst Beijing’s Greater Bay Area (GBA) initiative, which will link Hong Kong with 11 cities across Southern China with a population of almost 70 million and a combined GDP the size of Australia. Deepening integration will drive demand for local and foreign investment, most if not all of which will be channelled through Hong Kong.
It is unclear what Trump has in mind for Hong Kong, however, businesses looking to raise funds will continue to go to where they can get a reasonable return.
Yang Kang Chan, Partner, Hill Dickinson, Hong Kong
The city accounted for 54.1% of China’s utilised capital inflow in 2018, according to National Bureau of Statistics (NBS) data, and 55.5% of the country’s total outflow of foreign direct investment (FDI).
Bryan O’Hare, a partner at Hill Dickinson Hong Kong, argued that the development not just of the GBA project but also the Belt and Road Initiative (BRI) meant the city was well placed to capitalise on future dispute resolution opportunities.
The mainland government’s stated goal for BRI is to develop a global network of trade routes connecting participating economies, which represent more than one-third of global GDP. Prior to the pandemic, Morgan Stanley had estimated that China’s overall investment in BRI could reach $1.2-1.3 trillion by 2027.
O’Hare said: “Hong Kong is also the only common law jurisdiction within China with well-established case law, which is respected globally by the international business community and international investors. The city’s special reciprocal arrangement with mainland China makes it an ideal location for the resolution of BRI-related disputes.”
With Beijing’s grand plans for domestic and international trade and development in mind, unrest in Hong Kong over the last year will have left the central government deeply uneasy. It will remain to be seen how much ongoing impact there is from the national security law on day-to-day business, but many observers believe there to be little upside in China tightening its grip on Hong Kong institutions that contribute to both the city and the country’s economic growth.
As it stands, the US may have rescinded Hong Kong’s special status, but the World Trade Organization (WTO), the International Monetary Fund (IMF) and the World Bank (WB) have said they intend to continue treating the city as a separate entity. Too much change from Beijing would likely force a wider rethink.
This article was written by Andrew Kemp for Conventus Law in association with Hill Dickinson.
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