South China Morning Post
Comment›Insight & Opinion
Cheah Cheng Hye
Cheah Cheng Hye warns that the city will lose its competitive edge as soon as mainland Chinese businesses begin to shift elsewhere
Hong Kong’s domestic economy is mature, meaning that almost every company eligible for listing is already listed. Thus, Hong Kong depends very much on the Chinese mainland to support its role as a financial centre.
Currently, mainland Chinese companies – the “red chips” with their “H shares” – make up 42 per cent of the total market capitalisation of the Hong Kong stock market; actually, the true percentage of mainland Chinese involvement is much higher because many Hong Kong-registered companies are in fact controlled by mainland interests.
In 2015, about 80 per cent of funds raised through initial public offerings in Hong Kong were by companies from the mainland. Thanks to this fundraising by mainland companies, Hong Kong ranked as the world’s No 1 IPO market last year.
Mainland China needs to use Hong Kong because its own domestic capital market inefficient and has structural defects. But time may not be on Hong Kong’s side. Over the next five to 10 years, China’s reform programme, including deregulation, market-opening and enhancing the rule of law, may reduce its need to rely on Hong Kong.
Already, we see some warning signs: for example, the volume of trading on the domestic Chinese exchanges – in Shanghai and Shenzhen – easily exceeds the trading activity on the Hong Kong exchange.
We also see that the more exciting “new economy” companies, like those in the IT and health care sectors, are not listed in Hong Kong but in Shanghai and Shenzhen (where they fetch higher valuations) and, in the case of Alibaba, the United States. Hong Kong listings are very much in the old economy sectors like finance, manufacturing and energy.
So the risk for Hong Kong is that, over the medium term, it may gradually lose out.
Hong Kong has the added difficulty that its own society has become prone to social unrest. Social stability is important if Hong Kong wishes to continue to function effectively as a financial centre. Hanging in the air and likely to become an increasingly pressing issue is what will happen to Hong Kong after 2047, when its status as a special administrative region will expire under the existing treaty signed with Beijing. Instability and uncertainty are very bad medicine for a financial centre.
So the medium-term future for Hong Kong is challenging. There is real uncertainty – so much of what will happen is outside Hong Kong’s control, since it depends on developments on the mainland.
The “connect” schemes linking stock markets on both sides should expand from the linkage to Shanghai to include Shenzhen and may be followed by new schemes to link up bonds and primary-market activities, perhaps even trading in commodities. Certainly, the management of the Hong Kong stock exchange deserves praise for its bold initiative. In practice, however, the “connect” projects are not a magic bullet to solve our fundamental issue, which is whether and to what extent the mainland will continue to have a Hong Kong dependency.
In summary, Hong Kong will be fine in the near term, say, over the next five to 10 years. Indeed, there are golden opportunities for various sectors of the Hong Kong financial services industry, including asset management, wealth management and insurance.
To some extent, these opportunities are emerging because China has transformed rapidly from being an importer of capital into a major exporter of capital, creating huge flows of money.
On the mainland, a middle class of about 400 million people has emerged, out of a total population of 1.4 billion. Traditionally, the middle class put their savings into bank deposits and real estate. But, in China today, savers are getting impatient to diversify their wealth and enhance returns. With access to the internet, people are increasingly aware of the latest trends in finance and investment.
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In many ways, Chinese people have become richer faster than their financial system has developed to serve their needs. This undoubtedly creates a golden opportunity for well-positioned Hong Kong and its financial service providers.
The truth is, however, that Hong Kong’s competitive strengths are front-loaded. We are strong today partly because mainland Chinese financial systems are defective, but this state of affairs may not last for many more years.
And even if China’s domestic shortcomings persist, it still can reduce its dependence on Hong Kong by making more use of other places, such as London and Singapore. That’s what happened to the luxury goods business, which shifted away from Hong Kong to Japan and Europe. Even the stock connect schemes pioneered here are not a Hong Kong monopoly; at Beijing s pleasure, such schemes can be offered to other locations.
What’s needed today – and what’s not happening – is for Hong Kong to have a long-term plan and make consistent efforts to ensure it remains competitive. But this is a society that likes to live in the past, rather than look to the future.
The medium-term prospect looks uncertain, even worrying. As the mainland deregulates, Hong Kong-based financial institutions are expanding their physical presence on the Chinese mainland, to diversify from depending too much on Hong Kong alone.
Cheah Cheng Hye, a former journalist, is chairman of Value Partners Group Ltd, a Hong Kong asset management company listed in Hong Kong, with US$14 billion in assets under management