Taming the future: Hong Kong and China

A structural shift is taking place within Hong Kong’s financial sector. Its survival depends on moving closer to Beijing.

The Chinese enclave has certainly seen better years. First there was the economic fallout from the US-China trade war. Then came last year’s pro-democracy protests. And now a virus originating in China is spreading panic through the region.

While Hong Kong will undoubtedly recover, it will never be quite the same again.

Take the asset management sector, for instance. Data from Hong Kong’s securities regulator suggests that potential newcomers to the market are holding back from entering.

Much of this is likely to be short term, but there is also a more fundamental transition taking place as some of the smaller players decamp to the relatively calmer shores of Singapore.

There has always been a split between the two rivals. Singapore has put in a great deal of effort over the years to define itself as a hub for wealth management, while Hong Kong has positioned itself as the gateway to China. Over the past 12 months, this split has become wider.

Hong Kong has benefited hugely from China’s meteoric rise, but there is one very real danger on the horizon. Last year’s unrest has reminded Beijing of how disruptive democracy can be, and authorities may see value in having a financial centre closer to home.

Shenzhen, the border town that former Chinese premier Deng Xiaoping first used to flirt with capitalism four decades ago, is often mooted as one possibility. Indeed, a number of Chinese asset managers have already retreated there in the wake of the Hong Kong protests.

For the large global players, though, the passage to China will be much slower. Hong Kong still has some key benefits: an independent judiciary premised on UK law, a freely convertible currency, a deep pool of international talent and a widespread use of English, among others.

Last year’s unrest has reminded Beijing of how disruptive democracy can be, and authorities may see value in having a financial centre closer to home

This is all to Hong Kong’s advantage, but it is no time to be complacent. While Hong Kong and China will run along separate roads for some time to come, over the next 20 years, as China pushes ahead with its financial reforms, some degree of convergence will inevitably occur. Banks are starting to model, for instance, what would happen if the Hong Kong dollar were to disappear and be replaced by a convertible version of the Chinese yuan.

There are threats from elsewhere, too. Hong Kong has enjoyed great success thanks to the implementation of the Stock Connect and Bond Connect schemes, which link Chinese and global equity and fixed-income markets together. But others are now watching this space: the London Stock Exchange is currently working on a link with Shanghai, while there are some signs that Singapore may also be exploring such a tie-up.

This isn’t to say Hong Kong won’t remain central to China’s development for many years to come, but it needs to be careful of any missteps along the way. And it has made plenty of them in the past.

Four years ago, the asset management arm of AIA went to Singapore, following an unsuccessful attempt by the Hong Kong-based insurer to persuade its home authorities to provide the same tax concessions that the South-east Asian city-state could offer.

In 2017, Singapore displaced Hong Kong as Asia’s top financial technology hub, attracting 1.6 times more investment into the field than its erstwhile rival, according to data provider FinTech Global. This is a crown that Singapore retains to this day.

For Hong Kong to continue with its success as one of Asia’s top financial hubs, it must avoid similar slip-ups in the future.

It doesn’t matter if a few stragglers decide to head for Singapore or Tokyo. What matters is that those firms that choose to remain have what they need to stay relevant and focused in China and the rest of north Asia.