Hong Kong Being Re-Positioned As A Belt & Road Financial Trade Centre Competing With NYSE & Nasdaq

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Op/Ed by Chris Devonshire-Ellis

Hong Kong has been generating all the wrong headlines recently as new security laws passed by Beijing have resulted in apparent sanctions by the United States and punishments upon China threatened or imposed by other countries, including the United Kingdom. There have been many doom and gloom stories about Hong Kong’s immediate demise, and especially after US President Trump ceased Hong Kong’s special trade privileges last week. We discussed that over on China Briefing in the article US Revokes Hong Kong’s Special Status: Implications For Trade & Business. Then just yesterday, the United States stated it would introduce additional sanctions on China that would potentially limit Chinese banks access to US dollars.

But is this really the end for Hong Kong?

The answer to this question really revolves around how one views the territory – as a Gateway to China, as a China financial services hub, with fond memories as a low tax business and expat haven, as part of ‘One Country, Two Systems’ or as a developing, evolving Chinese city with an influential, international reach.

The problem for Hong Kong, some 23 years after it was returned to China from British administration, is that the ‘One Country Two Systems’ model has become outdated and no longer fit for purpose. As I argued here, the social issues have risen from lack of attention by Hong Kong politicians towards their own, while the furore over Beijing imposing security laws on the territory have twisted security regulations that are in fact reasonable.

What has occurred is that Hong Kong since 1997 has become outdated and small, with a limited reach and a creaking financial services industry that is well liked by foreign institutions but aren’t of much help to either Hong Kong’s progress or that of China.

All of which begs the question then of why the international media and countries such as the United Kingdom and United States taken such issue? It is an argument between maintaining the status quo for Hong Kong (Western opinion) and redeveloping it for new challenges and opportunities. But first lets understand where Hong Kong actually fits in terms of its global financial importance as a financial centre:

Stock Market Capitalization (USD)
NYSE 21 Trillion
Nasdaq 14 Trillion
Tokyo 5.7 Trillion
Shanghai 4.9 Trillion
Hong Kong 4.4 Trillion
Shenzhen 3.5 Trillion
London Stock Exchange 3.2 Trillion

As can be seen, the three Chinese exchanges: Hong Kong, Shenzhen and Shanghai still have less collective clout than Nasdaq and are just slightly over 50% of the total market capitalization of the NYSE. However, by the same token, all of China’s three bourses have now overtaken the City Of London in individual market capitalization.

One can understand London’s disquiet at being removed from a long held position of global financial clout, although were things to continue as they are, Hong Kong’s bourse would remain relatively small and London remain a player. But it is what is going to happen next to Hong Kong that is seriously worrying Washington, and US global financial competitiveness.

Just two months ago, China announced the launch of “Wealth Management Connect,” a scheme only targeted at the Greater Bay Area, which guarantees mutual access to wealth management products issued in Guangdong Province as well as in Hong Kong and Macao and is reserved for people living within the Greater Bay Area region.

Just last month, it was reported that two further brand-new exchanges would be created: One in Guangzhou, focused on the trading of carbon emissions options and futures, and the other one in Macao, a Nasdaq-like exchange aimed at diversifying the economy from gambling and entertainment, raising the total number of bourses operating in the Greater Bay Area to four when factoring in the Hong Kong and Shenzhen Stock Exchanges.

It is understood that both Hong Kong and Chinese regulators are currently working on a further expansion of a pilot scheme that will significantly streamline bank account opening administration in the Greater Bay Area and enable Hong Kong and Macau based banks to remotely set up Greater Bay Area bank accounts for their clients without the necessity for individuals to physically travel to the Chinese mainland in order to complete the required procedure and compliance check.

All that will be required is for account holders to provide an active Chinese mainland mobile phone number to allow them to access mobile payment services provided by WeChat Pay or Alipay.

This has been rolled out after a Pilot scheme launched at the end of 2018 in Hong Kong resulted in 100,000 existing customers of the Bank of China (Hong Kong) applying to open Bank of China mainland accounts without having to leave the territory.

Hong Kong and Macau citizens and businesses can therefore retain all their cross-border banking in one place, with their own bank, and in this way avoid the inconvenience of managing multiple bank accounts and statements and remembering several online passwords.

The participating banks, which include the Bank of Communications, Bank of China, Industrial and Commercial Bank of China (Asia), HSBC, Standard Chartered Bank, Hang Seng Bank and the Bank of East Asia, and allowing the remote set up of bank accounts through a mainland mobile phone number will improve innovation of cross-border financial services in the Greater Bay Area; make the operating of mainland subsidiary operations far easier, and especially as Fintech and other digital financial services begin to be launched.

It also means that despite the United States removing Hong Kong as a preferred trade status partner, the territory is being re-positioned as a key component part of a rather wider financial services area and able to compete with larger global markets that would begin to dwarf those in Tokyo and place it on a more equal ranking with the NYSE and Nasdaq. And this is without having to factor in the existing success story of Shanghai.

In short, it will elevate Hong Kong – as part of its integration into the Pearl River Delta – into a world-class city cluster to rival famous bay areas in Tokyo, New York and San Francisco. It will compete. In terms of talent acquisition, it already is: Qualified employees are being offered significant incentives to relocate to the Greater Bay Area: we listed the savings and incentives here.

Part of this remodeling of Hong Kong’s role will see it start to offer more complicated cross border financial services, including those involving Belt & Road Initiative countries. As I pointed out last week, trade with BRI nations now accounts for 30% of China’s total  which means again that despite the naysayers, Belt & Road infrastructure is increasingly important in China’s supply chains. Hong Kong’s professional and cross-border trade finance expertise will increasingly be used to provide for trade finance issues involving Hong Kong as a BRI financial and trade centre, with the Shanghai Free Trade Area as a support. Bruno Lee, the Chairman of the Hong Kong Investment Funds Association (HKIFA) has said that “The Wealth Management Connect will expand the customer size of Hong Kong fund houses by 10 times.”

That will attract returning Chinese who have been working on international finance in the US and UK. It doesn’t really matter then that the United States has pulled the preferential trade partner status on Hong Kong. It also calls into question about the true motives for doing so: a fairly unsophisticated attempt to prevent or delay Hong Kong’s emergence into such a role. In many ways, the truth of the matter is that the potential for trade growth in and along the Belt & Road Initiative, at least for China, is now more important than the development of trade with the United States. Hong Kong will endure evolutionary pains in getting there, but it will be on the right side of the global trade coin.

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Silk Road Briefing is written by Dezan Shira & Associates. The firm has 28 offices throughout Asia, and assists foreign investors into the region. For strategic advisory and business intelligence issues please contact the firm at silkroad@dezshira.com or visit www.dezshira.com