Dating back to the months leading up to the handover of the colony in June 1997 from Britain to China—when a property bubble grew bigger and bigger just as the global press parachuted into the city to pronounce Hong Kong’s last rites—there has never been a city in the world less impressed by political punditry. Much of the Western media is now once again forecasting Hong Kong’s impending eclipse as a financial centre. Newsweek magazine’s latest cover story is ominously titled “The end of Hong Kong".
Yet, in late May, the Hong Kong Exchange also received a somewhat less-publicised boost when MSCI switched the trading of a swathe of equity futures from the Singapore Exchange to HKEX. The licensing agreement means 37 futures and options contracts based on Asian and emerging market indices, including an India index, will now be traded in Hong Kong rather than Singapore.
The products have not been hugely successful in Singapore and may not prove to be in Hong Kong either, but the move is richly symbolic: At a high-point in China-US tensions, an American financial services company has cast its vote in favour of Hong Kong. Similarly, secondary listings, such as JD.com’s or NetEase’s $3 bn fundraising, also in Hong Kong this month, demonstrate that Hong Kong may actually benefit from the tensions between US and China.
The unfolding Hong Kong saga may also have implications for India. The city has long been thought to be a safer conduit for Chinese foreign investment into India—which, in recent weeks, has begun receiving greater scrutiny due to regulatory changes by New Delhi.
Considering the financial heft of Hong Kong, ignoring it is not a viable option in the long-term for any country. Naturally, China’s decision to impose a national security law on Hong Kong is being widely seen as an abrupt and worrying departure from the autonomy that was originally promised to the city in the 1990s.
China’s laws on freedom of expression and the right to protest are indeed very different from those prevailing in Hong Kong, where a liberal common law system protects free speech. Local police arrested about 9,000 people on charges such as rioting after last year’s protests for universal suffrage in Hong Kong, but only a fraction have been convicted. Beijing now appears to have lost patience with the Hong Kong government’s inability to legislate such laws in the past two decades.
The draft document for the new law is scant on details, but there is enough to alarm Hong Kong’s Bar Association. It points to worrying language such as “relevant national security organs of the Central People’s Government will set up agencies in (Hong Kong) to fulfil relevant duties to safeguard national security."
Under the ingenious “one country two systems" principles devised by the late Chinese leader Deng Xiaoping to ease Hong Kong back to Chinese sovereignty, Hong Kong’s courts, local administration and police have hitherto been autonomous. But as a foreign journalist based in the city, who chose not to be named, pointed out, once the new laws are in place, it remains to be seen how China would react if a Hong Kong court was adjudicating on a demand to seize assets, say, of an out-of-favour mainland Chinese political leader who had accounts with, say, HSBC.
In the past fortnight, Hong Kong’s previous de facto mayor vociferously demanded HSBC signal its support for the new laws. Both HSBC and Standard Chartered quickly did so—in jarring contrast to Standard Chartered’s support for the civil rights protests currently raging across the US.
Beijing’s proposed new law has shocked lawyers and journalists in the city while Hong Kong’s bankers remain optimistic that it will be business as usual. “I think that the enforcement will remain under the Hong Kong regime, under Hong Kong judges," said a senior investment banker who has been in the city since the 1990s. The truth is grafting a law devised in communist China upon what has been hitherto the most liberal city in Asia is a journey into the unknown; no one will really know how things will work till the courts and police in Hong Kong start administering the new law.
As the bar association points out, to comply with Hong Kong’s mini constitution, definitions of what constitutes sedition or terrorism and the judicial and police enforcement of these new laws must comply with international covenants on human rights. Given Beijing’s current belligerent mood, it is hard to see its new law and proposed new constabulary in the city doing so.
On 15 June, the deputy head of China’s Hong Kong and Macau office said: “[The central government’s jurisdiction over such cases] would not affect the independent judicial and final adjudication enjoyed by Hong Kong in accordance with the Basic Law." But he also said Beijing would retain control over certain cases that involved national security.
Christine Loh, a former local legislator and a former minister in the Hong Kong government, made the point that Singapore also has security laws—and indeed courts tough on political dissent—and the financial industry does not object to them. “If people are not put off doing business in Singapore with its national security laws, they are unlikely to freak out over the Hong Kong version."
The lack of alternatives
The gap between the two Asian cities cast as rivals is so wide on just about every yardstick that in conversation after conversation with bankers, the oft-repeated view was that there is no alternative to Hong Kong for investors seeking to invest in and investment banks seeking to service the capital raising requirements of China, the world’s second-largest economy. “The question to ask is ‘where would you go’ (from Hong Kong)," said a Hong Kong banker. “You are not going to go to Singapore. You can’t go to Tokyo to service China. There is a bit of ongoing relocation (to Singapore) but its back-office staff. It’s not brokers or traders."
The Economist recently charted a matrix based on criteria such as initial public offerings, currency trading, interest rate derivatives and market capitalization. On each of these, Hong Kong was in the top five (typically among the top three). As a financial centre, Hong Kong has jumped ahead on global tables since 2000 as Chinese state-owned enterprises and private companies have sought listings overseas.
There has been a peculiarly schizophrenic narrative about Hong Kong since before the handover: while the data tells a mostly positive story, the worries overseas about its political future under China tell an entirely different story. “One of the ironies of the Chinese takeover is that Hong Kong has grown by leaps and bounds. The market is many step functions larger than it used to be 23 years ago," said Nirgunan Tiruchelvam, head of consumer sector research at Tellimer in Singapore.
On its part, business in Hong Kong is mostly reacting with relief to the prospect of a security law because last year’s political protests, which sometimes ended in violence, unnerved many and pushed the city into a deep recession even before the pandemic.
The chasm between Beijing and the young protesters, who demanded universal suffrage and in some cases independence, remains unbridgeable. The flash mob, leaderless strategy of the young protesters inspired by the Bruce Lee films of the 1970s made it difficult for the local Hong Kong government to negotiate with them, even if it were inclined to do so.
Despite this backdrop over the past year, a bellwether underlining the belief that the financial system would carry on much as before is that in Hong Kong, the majority of deposits with local banks remain in Hong Kong dollars. This is despite the fact that residents have the freedom to switch out of the local currency at any time to currencies such as the US dollar or the euro or transfer the money elsewhere if they were nervous about capital controls being imposed or the city’s prospects as a financial centre.
The US-China tensions
I was a junior writer at Fortune in New York in the mid-1990s when the magazine printed a cover story by the late Louis Kraar provocatively titled, “The death of Hong Kong." Hong Kong’s occasionally hysterical elite reacted as if it were a curse from the heavens, but the city carried on undaunted till the Asian financial crisis in the second half of 1997 took the city’s property market down with it. There was political turbulence again in 1999 when Beijing overruled a landmark decision by the city’s de facto supreme court.
Yet, on a visit to North America in 1999, former premier Zhu Rongji, who spearheaded the critical reforms that led to China’s accession to the World Trade Organization in 2001, praised Hong Kong’s Securities and Exchange Commission for training their counterparts in communist China. Two decades on, China is a manufacturing giant but the gap between China and Hong Kong in securities law, the adjudication of commercial contracts, and the independence of the Hong Kong judiciary relative to China’s, not to mention a dense ecosystem of bankers and traders, remains as wide as it was. Beijing has astutely used Hong Kong for the past two decades as an efficient conduit for global capital. It well understood, from Deng to Zhu, the capitalist city’s true worth. And, Hong Kong’s European and US investment banks have been enthusiastic ambassadors for China, a good housekeeping seal despite questionable corporate governance at Chinese companies, and a fawning but highly effective public relations agency. The city has accounted for the most money raised via initial public offerings by any financial centre globally in seven of the last 11 years.
This huge lead will be sustained or damaged depending on how wide-ranging China’s security laws for Hong Kong prove to be. As one banker says, if the laws help Hong Kong deal more strictly with political protests, this would not alarm its financial industry unduly. If the enforcement of the laws went further and extended to censoring the vibrant media, this could be got around with virtual private networks. But, many hedge funds, whose offices could be quickly wound up, are contemplating a plan B, according to the Financial Times, if the new laws impinge heavily on the judiciary and the media. Hedge funds in Hong Kong manage $91 bn in assets, more than what is managed in Singapore, Japan and Australia combined.
There also remains the risk that the Trump administration could seek to hurt China by damaging Hong Kong as a financial centre. This might involve imposing financial sanctions in the way the US has on Russia and Iran. Most observers believe that China’s role as the second-largest economy in the world means that it is too large for this to work. But, China has vulnerabilities.
Chinese companies have hundreds of billions in US-dollar debt and its banks have large US-dollar exposure. This makes China very dependent on Hong Kong because the city acts as a $10-trillion clearing house for such US-dollar-denominated transactions. “That would be like the nuclear button," said a senior executive at a US investment bank who believes that it is unlikely to be used.
Indeed, US policy on China often seems muddled. By cutting interest rates, the US Federal Reserve inadvertently helped ease what had loomed as China’s dollar squeeze a few months ago. The administration’s threatened trade sanctions against Hong Kong would be pointless; the US enjoys a trade surplus with Hong Kong of about $30 bn. “The US and China are going to have to work things out," the executive quoted above said. “Things are not going to come to a head over Hong Kong." As always, Hong Kong remains confident it can continue to make money in the middle.
Rahul Jacob is a former Hong Kong bureau chief for the Financial Times