Post – Security Law: The Dawn of Hong Kong Financial Hub?

Post – Security Law: The Dawn of Hong Kong Financial Hub?

Joyce Lok Yiu Lo
Latest posts by Joyce Lok Yiu Lo (see all)

The global economy is gradually rebounding from the effects of the COVID-19 pandemic. Many major stock indices recorded double-digit gains throughout the year. However, amidst this recovery, Hong Kong stands out as an exception. The Hang Seng Index, a local benchmark for the city’s market performance, has experienced a significant decline of almost 50% from January 2021 to January 2024. This downturn has left the city’s financial markets stagnating. Implementation of the Security Law in 2020 and the recent passing of another – Article 23 – has reignited concerns regarding the future of Hong Kong’s financial hub status.

Hong Kong is recognized as a top-tier international financial center, renowned for its strong market infrastructure and straightforward tax system. Its legal system, rooted in common law principles, ensures the rule of law. A key factor in Hong Kong’s success has been the “one country, two systems” framework. This unique arrangement has propelled Hong Kong to become Asia’s leading financial hub, maintaining its position among the world’s top financial centers according to various indexes.

National Security Laws

The implementation of the national security laws raises concerns regarding the impact on Hong Kong’s international financial status. The emphasis on national security and threat from “foreign forces” in the security law has raised the stakes for foreign capital and businesses. While authorities argue these measures are necessary to protect the city and ensure stability, critics express concerns about the ambiguity surrounding the definition of the national security. They raise apprehensions regarding closed-door trials and the imposition of severe penalties for loosely defined offenses like insurrection and treason. Despite reassurances from authorities that “normal” businesses will not be affected, local and international skeptics remain critical. Although, some question singling out Hong Kong when other countries also have national security laws in place.

The security laws have raised concerns about Hong Kong’s financial hub status. The Trump administration revoked Hong Kong’s “special status”. This does not only affect trade but also carries broader implications for Hong Kong’s international financial status. Amidst fierce competition from nearby markets. Singapore, a consistent competitor, recently beat Hong Kong as the world’s freest economy. Global banks and businesses have downsized their operations and chosen to relocate, while Singapore emerges as their preferred destination. The official data shows the number of global companies’ regional headquarters in Hong Kong has decreased by 8.4% since 2019, with a significant 30% drop in staffing levels. Emerging markets in the region pose additional challenges. India surpassed Hong Kong as the fourth largest stock market in January 2024.

A Shift of Financial Dynamics in the Region?

Competition for Asian leading financial hub between Hong Kong and Singapore stock markets. Source: Getty/Akira Kodaka

Hong Kong’s Reign as an International Financial Hub Coming to an End?

While some critics express concerns, others remain optimistic about Hong Kong’s status as the leading financial center in the region. David Liao, co-chief executive of HSBC Asia Pacific, remarked, “Hong Kong’s strength as a global financial center is best demonstrated by its role in the reform and opening up of China’s economy.”

The assessment of whether Hong Kong’s international financial hub status will endure can be approached from two perspectives. Firstly, it depends on the Chinese central government’s ongoing recognition of Hong Kong’s significance as a financial center, and whether emerging Chinese financial markets could replace Hong Kong’s role. Additionally, the perception of foreign investors regarding its utility and reliability as a financial hub carries significance.

Hong Kong: Still an Essential Financial Hub for Beijing?

Hong Kong functions as a vital financial center for Beijing. It fulfills China’s objectives of maintaining domestic financial stability and integrating with the global financial system without sacrificing her control on the market. Hong Kong’s unique status allows China to pursue her ambitions, while serving as a gateway for international investors to enter China.

As China’s reform policies advance, the gap between Hong Kong and mainland markets narrows. Some argue that China is reducing reliance on Hong Kong by promoting mainland cities like Beijing, Shanghai, and Shenzhen as new financial hubs. Recent developments, such as direct market agreements between Shanghai and London and Shenzhen and London, challenge Hong Kong’s traditional role.

Beijing has big financial hub ambitious for mainland cities like Shanghai, Shenzhen etc. Source: AsianTimes/Xinhua

Despite these shifts, Hong Kong maintains significant advantages. Its connectivity and centrality to global finance support Beijing’s efforts to promote the renminbi’s international use. Unlike onshore hubs, Hong Kong offers unique market and regulatory buffers, ensuring market openings do not endanger domestic financial stability. The absence of foreign exchange controls and the Hong Kong dollar’s peg to the US dollar provide financial stability. Additionally, its established infrastructure and transparent regulatory framework attract foreign investment. Beijing’s strong rhetoric about Hong Kong’s status as a leading financial hub in Asia-Pacific underscores its importance. Despite emerging mainland competitors, Hong Kong’s distinct advantages suggest it will retain significance in Beijing’s eyes.

To Invest or Not To?

The success of Hong Kong lies in its perception as distinct from other mainland markets and as a gateway to enter the Chinese market. However, the passage of national security laws and Beijing’s closer grip, suggests a potential transformation into just another Chinese city. Although some critics argue external perceptions of Hong Kong’s autonomy may not significantly impact its key advantages, such as its peg to the US dollar. They contend that globalization’s network effects and entrenched dynamics within the international financial system make it challenging to disrupt these advantages.

Kevin Tsui, chief economist at Orientis, asserts, “Even if Hong Kong is just a Chinese city, foreigners want to do business with China.” However, others emphasize the importance of perception. Johannes Hack, president of the German Chamber of Commerce, notes, “While the city is still distinctly different from the mainland, the focus on security may increasingly blur the distinction in people’s minds.”

Outside Perception of Hong Kong has changed

Johannes Hack, president of the German Chamber of Commerce

The future of Hong Kong hinges not only on whether it becomes another mainland city but also foreign investors’ willingness to invest in China. Geopolitical tensions between Washington and Beijing have made foreign investors increasingly wary of pouring funds into Hong Kong’s stock market. The pandemic has worsened the situation, disrupting the global economy. Meanwhile, China grapples with mounting debt and a property market crisis. As a result, investors, particularly those from the West, are becoming more hesitant to bet on Hong Kong’s financial future. Unless these challenges are addressed and investor confidence is restored, Hong Kong’s position as a top-tier financial hub remains uncertain.

New Direction for Hong Kong?

Hong Kong continues to play a crucial role in China’s ambitious “Going-Out Scheme”. People’s Bank of China assigns Hong Kong the pivotal leading role in the “Greater Bay Area”. These developments indicate that Hong Kong’s financial status remains significant in China’s plans. The Belt and Road Initiative opens doors for Hong Kong to draw in investors from non-traditional regions such as the Middle East, expanding beyond its reliance on Western investors. This suggests a potential shift in Hong Kong’s role and direction in the global financial landscape. As Hong Kong embraces these new responsibilities and opportunities, it may undergo a transformation in its financial market dynamics.

The 8th Belt and Road Summit 13th September 2023. The policy dialogue session titled "Tapping into the Potential Middle East".
The 8th Belt and Road Summit in Hong Kong, 13th September 2023. The policy dialogue session titled “Tapping into Potential Middle East”. Source: HKSAR Press Release

While it is too early to evaluate the risks of the national security laws to businesses and financial markets. Hong Kong’s financial status faces challenges ahead, with little time to spare. While Hong Kong retains its importance for China, the worries of foreign investors and the emergence of new financial hubs in the region, such as Singapore and India, pose significant threats. Hong Kong’s future as a premier financial center will depend on its ability to adapt to these shifting dynamics and maintain its competitive edge in the global financial landscape. All while addressing external concerns and uncertainties brought about by the new security laws.

Think about…

  • How do you perceive the impact of geopolitical tensions on Hong Kong’s financial future?
  • How can Hong Kong adapt and succeed amid political changes and evolving financial conditions?
  • How might recent developments in neighboring markets reshape the financial landscape of the region?

Suggested further reading

Article 23 then and now: What changes between 2022 and 2024, as Hong Kong’s local security law is resurrected

Goodbye HK, hello S’pore: More global firms shifting staff, opertaions despite city’s efforts to retain them

How China’s slowdown is deepening Hong Kong’s ‘existential crisis’

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