Hong Kong’s bright flower is fading

Anti-government protests in Hong Kong highlight the increasing political risk as the city's capitalist system converges with China's socialist regime.

Hong Kong will struggle to maintain its prosperity and role in the world as its politics converge with those of Beijing. But China’s finances are also at risk if the territory’s demise is abrupt.

Hong Kong, whose emblem is the bright red Bauhinia flower, draws its strength from its historical roots as a gateway for trade and finance between China and the rest of the world. As a Special Administrative Region, the city has been able to enter into treaties with counterparties that consider it distinct from China, further solidifying its position as an offshore centre.

For the business community, Hong Kong has long been an attractive hub – not just due to its geographical proximity to China but also because of the autonomy, transparency and predictability of its judicial and administrative institutions.

As Beijing and its allies in Hong Kong seek to tear down these differences, they are handicapping the city’s ability to fulfil its historical role.

Broad-based protests in Hong Kong against the encroaching influence of Beijing have highlighted this inexorable process internationally, let alone the approaching end of the “one country, two systems” framework in 2047. The perception of Hong Kong as a stable place to do business has already been badly damaged.

Fitch downgraded Hong Kong’s credit rating on September 6 to AA and predicted zero economic growth this year. Its peer, Moody’s, followed by cutting Hong Kong economic outlook to negative on September 16.

Beijing should resist the temptation to accelerate the assimilation of Hong Kong to stop the embarrassing media footage of resistance to its core values – and it should do so, in part, out of self-interest.

The free movement of capital in Hong Kong allows Chinese companies easy access to foreign capital while the motherland maintains a relatively closed capital account. Between 2010 and 2018, about two-thirds of mainland Chinese companies’ offshore bond finance, 73% of their equity financing and a quarter of their syndicated loans were raised in Hong Kong, according to French bank Natixis.

For the past 20 years, this publication has tracked the hundreds of mainland Chinese state-owned enterprises and fast-growing startups like Megvii that have turned to Hong Kong for their IPOs.

The offshore bond financing available in Hong Kong is also important to Chinese companies; as well as giving them access to hard currency and a greater diversity of investors, they can borrow for longer than is generally possible on the onshore market.

Whilst convergence between the two regimes looks unstoppable, some delay would at least give China’s own financial markets more time to mature and open them up further to foreign institutional capital. As yet, mainland China’s markets are still dominated by retail investors and are notoriously volatile.

Longer-term, Hong Kong is unlikely to find another function as prominent as China’s de facto offshore centre. It will be one of many gateways into China and its comparative advantages will fade.


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