HK’s still the place to make a mint
Deepening financial links between the SAR and the Chinese mainland are key to keeping city’s economic hub status amid a booming market for stocks, bonds and offshore renminbi. Zhou Mo reports from Shenzhen and Ao Yulu from Hong Kong.
As the Hong Kong Special Administrative Region celebrates the 25th anniversary of its establishment on July 1, the city’s financial industry is set to unveil a new glorious chapter in the annals of its development, fueled by deepening financial connectivity with the Chinese mainland, a booming offshore renminbi business and green finance.
In the past two and a half decades, Hong Kong has strengthened its position as an international financial center. Financial services — one of the SAR’s pillar industries — have played a pivotal role in its economic growth, contributing 23.4 percent of the local GDP in 2020, doubling from 10.3 percent in 1997, according to official statistics. More than 273,700 people worked in the sector in 2020, accounting for 7 percent of the city’s labor force.
Employment and the value added of financial services grew by 4 percent and 12 percent respectively between 2018 and 2020.
Although Hong Kong’s economy has been hard hit by social unrest and the COVID-19 pandemic over the past few years, the city’s position as a world financial hub has remained intact, given the SAR’s competitive advantages of a sound financial infrastructure, a developed legal system, a highly skilled talent pool, and proximity to the vast mainland market.
Hong Kong has remained in third place in the global financial-center rankings, after New York and London, according to the latest Global Financial Centers Index jointly published by Shenzhen-based think tank China Development Institute and London-based think tank Z/Yen in March.
In a report released in the same month, the International Monetary Fund reaffirmed Hong Kong’s status as a major global financial center, saying the city’s financial sector has continued to expand robustly despite COVID-19.
“Since 1997, Hong Kong has overcome many severe external shocks, including the Asian financial crisis, the dot-com bubble burst, the SARS outbreak, and the COVID-19 pandemic. Each time, Hong Kong rebounded swiftly and leveraged these setbacks to keep enhancing its transparency and regulations, increasing fiscal reserves and grooming more talents to ward off similar challenges,” said Eden Wong Yi-dung, president of CPA Australia Greater China Division.
“Such resilience is pivotal in building global investors’ confidence in Hong Kong’s mature financial system and the city’s ability to withstand turmoil. It’s an essential trait for Hong Kong to stand out from other places and become a leading financial center.”
Enhanced connectivity
Deepening financial links with the mainland is seen as one of the major drivers behind the growth of Hong Kong’s financial sector in recent years. From the launch of the Shanghai-Hong Kong Stock Connect in 2014, the Mutual Recognition of Funds in 2015, the Shenzhen-Hong Kong Stock Connect in 2016 to the Bond Connect in 2017 and the Crossboundary Wealth Management Connect in 2021, a number of initiatives have been introduced to give full play to Hong Kong’s unique role as a connector between the mainland and overseas markets.
“Through close dialogue with regulators in Hong Kong and on the mainland, the Stock Connect scheme has seen major improvements and is more in line with international practices. When we talk to managers, they say the Stock Connect market is now a channel of choice for foreign investors to invest in the mainland and Asian markets,” said Sally Wong Chi-ming, CEO of the Hong Kong Investment Funds Association.
It’s not just the Stock Connect, but the Bond Connect as well, which is also gaining increasing importance although, in terms of usage, it’s still not as extensive as the former, she said.
Since the two Stock Connects were rolled out, the mainland stock markets have seen net capital inflow of more than 1.6 trillion yuan ($240 billion) through northbound trading, while southbound trading had brought more than HK$2.3 trillion into Hong Kong’s stock market as of May, according to the HKSAR government. The market capitalization of Hong Kong stocks had grown from HK$4.6 trillion ($590 billion) in July 1997 to HK$38 trillion in May.
In the bond market, foreign holdings of mainland onshore bonds exceeded 3.7 trillion yuan through the Bond Connect and other channels. The Bond Connect’s average daily turnover via northbound trading reached 26 billion yuan last year — an elevenfold increase from 2017 when it was launched.
“By and large, these two connect schemes have been instrumental in helping overseas investors to gain exposure to the Chinese capital markets. This has triggered more and more major international index providers to include them into the international flagship indexes. This, I think, is a very beneficial cycle and is definitely in the right direction,” Sally Wong said.
She pointed out that the MRF and WMC programs have not been overwhelming compared with the Stock
Connects, but believes there’s vast potential for growth if the operational restrictions are lifted.
According to an HKIFA survey conducted in January and February, 32 percent of respondents said they are participating in the MRF, and 29 percent said they are actively considering or intending to launch the service this year. The findings were based on interviews with 31 fund management companies in Hong Kong.
The respondents are more optimistic about the WMC’s potential in the medium and longer term, with 31 percent believing that the program would come first in terms of opportunities. About 28 percent see the MRF as having the highest potential.
“If we can leverage these schemes, there will be more (financial players) coming to Hong Kong to serve the needs of mainland investors. This will definitely broaden the whole ecosystem of Hong Kong because if more players come in, there will be more support — the middle office, back office, distribution channel, the professionals. So, the whole value chain will be strengthened,” Sally Wong said.
Thriving offshore business
The offshore renminbi business, which has played a crucial role in Hong Kong’s financial development in the past 25 years, has helped to bridge the financial systems of Hong Kong and the mainland, offering huge business opportunities by attracting investments from the mainland and abroad.
The HKSAR’s journey in developing its offshore renminbi business began in 2004 when banks in the city were allowed to provide offshore renminbi banking services to personal customers. The business has since undergone significant expansion. The first issuance of dim sum bonds — offshore renminbi-denominated bonds — in 2007 and the introduction of the pilot program for cross-border trade settlement in renminbi in 2009 have accelerated the process.
According to the Hong Kong Monetary Authority, the SAR currently has the world’s largest renminbi capital pool outside the mainland — about 874 billion yuan as of April, 14 times the size of that in 2009. The annual issuance of dim sum bonds grew from 10 billion yuan in 2007 to 109.6 billion yuan last year.
About 75 percent of the world’s offshore renminbi payments were settled through Hong Kong as of May, according to the Society for Worldwide Interbank Financial Telecommunication.
The nation’s 14th Five-Year Plan (2021-25) stressed Hong Kong’s role in developing itself into an international offshore renminbi center, while the Outline Development Plan for the Guangdong-Hong Kong-Macao Greater Bay Area calls for Hong Kong’s offshore renminbi business to be beefed up.
Hong Kong’s chief executive-designate, John Lee Ka-chiu, has vowed to reinforce the city’s role as a global offshore renminbi center, an international asset management hub, as well as a risk management center, and promote other financial market businesses.
“Undoubtedly, Hong Kong is the most important offshore renminbi hub,” said William Deng Weishen, a North Asia economist at UBS. “Looking back at the past few years, I think the offshore renminbi business has been most important in developing the city’s financial services sector. For the future, it will be the most important growth point as well.”
HKMA Chief Executive Eddie Yue Wai-man said that despite the challenging economic environment in the past few years, there is huge potential and development space for the city’s offshore renminbi business.
China is the world’s second-largest economy, but only 18 percent of its cross-border trade is settled in renminbi. This means there is huge room for the Chinese currency to play a part on the world stage, he said. “Hong Kong’s offshore renminbi market can play a more important role, especially in the renminbi’s internationalization.”
The HKMA has been exploring ways to develop the offshore renminbi market in recent years. “There’re still two main issues for us to tackle — how to promote the liquidity of offshore renminbi, and how to launch more renminbi products,” Yue said.
He said the authority also plans to step up services of its Central Moneymarkets Unit to boost financial links between Hong Kong and the mainland, including the Stock Connect, thereby further invigorating the city’s offshore renminbi market and benefiting the renminbi’s internationalization. “There’s no shortcut. We still have a long way to go. But we should not worry about it because, at least, there’s still a way for us to develop it.”
Yue also believes green finance is a key area in which Hong Kong has great potential. Green finance activities have seen huge growth in recent years, he said, adding that the SAR government has issued green bonds to the public and aided some small and medium-sized enterprises that have applied for green loans.
“As a small open economy, Hong Kong is prone to external shocks and global economic downturns. Its market will, therefore, likely see further volatility in the next 25 years. However, I believe Hong Kong’s wellregulated and resilient financial system should help the city navigate any such turbulence and maintain its position as a world financial center,” Eden Wong said.