China's grip on Hong Kong eroding its status as financial hub, investors believe
The Chinese government’s increasingly tight grip on Hong Kong is undermining the former British colony’s position as a regional financial hub, analysts and investors say.
In its latest move to clamp down on Hong Kong, which has been a centre of resistance against the ruling Chinese Communist party, the mainland government last month introduced a sweeping national security law that criminalises protest and dissent.
But while the target of the law may have been Hong Kong’s pro-democracy movement, which has been protesting in the streets of the city-state for a year, it has also spooked a business sector already nervous about Beijing’s control.
Amid a broader move towards Singapore
as a regional hub for multinationals, money has been quietly leaving Hong Kong since late last year – although the territory’s monetary authority disputes this.
Now, investors are also worried about the reaction of the increasingly belligerent Trump regime in the United States, which could put tariffs on Hong Kong or sanction its rulers.
The Australian government is also considering its options, which include cancelling a free-trade agreement struck in February and joining with other western countries in accepting refugees from Hong Kong – a move that could in turn signal the territory’s population is falling as people leave into a full-blown exodus.
“We have expressed deep our concerns in relation to the security laws and their application in Hong Kong,” the
Australian trade minister, Simon Birmingham, told Sky News last week.
“We desperately wish to see Hong Kong retain its status as a location where under the one country, two systems, the basic law is respected – it continues to be upheld by an independent judiciary, that we want to see those key principles retained because that’s what’s made Hong Kong such an important centre for commerce and investment across our region.”
Hong Kong was a trade centre almost from its foundation in 1841 as a base for British attacks on China designed to protect the opium trade. Throughout the 1800s and 1900s, its status as a tariff-free free port made it an attractive staging point for companies that wanted to do business with mainland China.
As China industrialised, its similarly minimalist approach to corporate taxation, coupled with the use of English common law to govern contracts, helped turn it into the world’s sixth-biggest financial centre, thrusting a series of office towers into the skies above the island.
When Britain handed Hong Kong back to China in 1997, the companies that called the territory home were promised the status quo would hold for another 50 years.
But in recent years Beijing’s obvious impatience with the level of dissent in Hong Kong, its push to be able to extradite people from the territory and incidents including the kidnapping of bookshop owners selling anti-party tomes have sapped confidence in the rule of law in the city.
The national security law, which makes it a crime punishable by long jail sentences to agitate against Chinese rule of Hong Kong, adds to those existing concerns.
Last month, ratings agency Moody’s said the law was consistent with attempts by China to bring Hong Kong’s system of government closer to the mainland’s that already prompted it to downgrade the territory’s credit rating in January.
In January “we noted more significant constraints on the autonomy of Hong Kong’s institutions than previously thought, contributing to a less effective executive and legislative response to the population’s demands”, Moody’s said.
It warned that for Hong Kong’s rating to remain higher than China’s, the territory’s “distinctive institutional
framework” would need to remain in place.
“While not our baseline assumption, indications that further convergence in executive, legislative and judicial institutions with those of the mainland over time was materially weakening Hong Kong’s macroeconomic and financial policymaking institutions would have negative implications for economic and fiscal strength and the rating,” it said.
Money has already started leaving Hong Kong, with US$5bn quitting the territory last year as Beijing pushed for the extradition bill, according to Bank of England figures.
The idea of “capital flight” has been rejected by the Hong Kong Monetary Authority. In December, its deputy chief executive, Howard Lee, rejected this, saying that the territory’s “financial system is just too complex and sizeable to be fully understood from a particular perspective”.
Turmoil on the streets, Beijing’s crackdown and the coronavirus pandemic have also taken a toll on Hong Kong’s sharemarket.
Its benchmark index, the Hang Seng, has been wallowing for two years, slumping from more than 32,000 points in February 2018 to around 26,000 this week.
Hongkongers also appear to have been voting with their feet as well as their wallets.
The territory’s population was already showing signs of levelling out, or even shrinking, before the law came into force.
It shrank by a little more than 6,000 people between the middle of last year and the end of the year, leaving a little more than 7.5m people living in the territory, according to Hong Kong’s census and statistics department.
The rate of growth has been slowing for a decade, falling from rates of close to 3% in the late 1990s, shortly after the UK handed the territory back to China in 1997, to less than 1% in more recent years.
“There’s been a brain drain under way for over a year now, since the protest movement started and the underlying democracy deficit here, the fact that the legislative council and the chief executive of Hong Kong are not democratically elected, that is the main grievance,” Hong Kong activist investor David Webb told ABC radio on Saturday.
He said the communist party did not “understand the damage that they’re doing”.
“They do want to have a international capital market on Chinese soil in Hong Kong because of course the mainland capital markets are behind a wall of capital controls, that you can’t freely move money in and out of the mainland,” he said.
“Hong Kong is their only option for that right now unless you were to set up a stockmarket in Macau.
“So they do need that and I don’t think the mainland government appreciates how much these markets depend on free exchange of information and expressions of opinions, good or bad, about how the government is running the country.”
Webb has been in Hong Kong for more than two decades, making a fortune picking sharemarket winners and a name for himself exposing corporate misconduct through his website, webbsite.
He said he was staying but the national security law would make his life more difficult.
“I will probably have to self-censor some of what I might have said because of the new laws.”