Hong Kong: a comeback with Chinese characteristics
After a stagnant few years, the territory’s financial sector is regaining its global standing with a push from Beijing
Arjun Neil Alim, William Sandlund and Chan Ho-him in Hong Kong
Ho Lee Fook, a gilded contemporary Chinese restaurant in Hong Kong’s SoHo, is a place where many of the city’s financial professionals gather to celebrate closing deals and soaring stocks.
Its name means “good fortune for your mouth” in Cantonese, but in English it resembles a phrase some might use to express shock at the Chinese city’s rapid revival.
“I’ve never been more optimistic about Hong Kong,” says Syed Asim Hussain, founder of the Black Sheep Restaurants group, which runs Ho Lee Fook and other upmarket restaurants frequented by expats and financiers.
Corporate bookings for December are looking better than any of the past five years, he says.
Just as financiers’ appetite for posh eats has rebounded, the city around them has begun to emerge from a prolonged slump in dealmaking.
The former British territory was written off by many as a global financial hub after Beijing and the local government crushed the pro-democracy movement, pushed through unpopular legal changes and drove away many skilled immigrant workers with tough Covid-19 measures.
But Hong Kong’s financial industry, which has pulled in knowledge workers from around the world and generates much of its tax revenue, has bounced back.
The city-state is now ahead of rivals in New York, London and Mumbai in global rankings for initial public offering funds raised and its Hang Seng is among the best-performing indices worldwide.
Yet much is different from earlier boom cycles.
The vast majority of the new companies listing are Chinese, often already public, companies.
And the capital pouring into Hong Kong is increasingly Chinese, via the stock connect that links Hong Kong with mainland investors through Shanghai and Shenzhen.
The “mainlandisation” of Hong Kong’s capital markets is under way, as the world’s second-largest economy leaves its mark on the territory.
“Beijing has reinvented Hong Kong for its purposes . . . but also to keep Hong Kong’s image as a thriving financial centre alive,” says Stephen Roach, former chair of Morgan Stanley Asia.
“It’s a very different city and financial centre to what we thought Hong Kong would be as recently as four to five years ago.”
This moment is just the latest inflection point for a city that has reinvented itself countless times, from fishing village to trading post, from textiles hub to manufacturing workshop, while transitioning from British-dependent territory to Chinese special administrative region.
It is an echo of Hong Kong’s rapid industrialisation in the 1950s and 1960s, boosted by mainland emigrants and a US-led embargo of the People’s Republic of China.
Now Hong Kong’s role is less that of a window for foreign capital and companies into China, as a gateway for Chinese investors and businesses to the rest of the world.
The designation also leaves a question mark over the future of the city’s “real economy”, as well as over that of another international Chinese city, Shanghai, which once looked to serve a similar role.
“Our slogan used to be Asia’s world city,” Hussain says, “and I think our new identity is China’s world city.”
On the first day of a new company’s trading on the Hong Kong Exchange, an executive is invited to the HKEX headquarters to bang a ceremonial gong at the start of the day.
At a listings ceremony in July, staff at the exchange struggled to fit six gongs on the stage for all the newly traded stocks that morning.
The Financial Times revealed last month that the HKEX pipeline had hit an all-time high of more than 200 companies filing to list, in a sign of the frenzied rush to raise capital in the city.
Beijing’s de facto blueprint for Hong Kong’s revival was launched by the China Securities Regulatory Commission, the country’s national financial regulatory body, in April 2024.
The document outlined five schemes to boost Hong Kong in line with President Xi Jinping’s desire to “consolidate and enhance Hong Kong’s position as an international financial centre”.
Those points included expanding the stock connect scheme that allows mainland Chinese investors to put money into Hong Kong-listed assets, and vice versa, as well as pushing Chinese companies to list in the territory.
“The real catalyst starting from last year [was] when CSRC announced those five measures, especially for leading [Chinese] companies coming to IPO in Hong Kong,” says Robert Lee, a Hong Kong lawmaker representing the financial services sector.
Chinese companies listened.
Amid a cautionary environment for global IPOs, Hong Kong has shot to the top of global rankings in the first half of the year in terms of funds raised from listings.
Electric vehicle battery maker CATL raised more than $5bn in the largest listing globally since 2023 — in a deal that brought global funds and attention back into Hong Kong.
Most of the big deals, including CATL, Jiangsu Hengrui Pharmaceuticals and white goods maker Midea which listed last year, are companies that are already listed in Shanghai or Shenzhen, launching secondary listings in Hong Kong.
Others launched blockbuster share sales, like Xiaomi for $5.5bn in March.
“Companies from mainland China are choosing to list on HKEX to connect with global capital and scale internationally,” says Bonnie Chan, chief executive of the city’s stock exchange, who added that there was also some interest from companies from other parts of Asia.
Some of the territory’s western bankers sniff that secondary listings from Chinese companies already public in Shenzhen or Shanghai are not comparable in terms of the scale of work, fees or prestige of a real IPO, comparing them instead to follow-on equity sales.
Even so, the return of billion-dollar listings to Hong Kong has given western bankers plenty of work.
The share of Hong Kong equity issuance claimed by the top three western banks has risen to above 40 per cent, up from 26 per cent of a much smaller pie the year before.
This year, Morgan Stanley, Goldman Sachs and UBS threaten to push China’s CICC and Citic off the medal podium in Hong Kong equity sales.
One reason for this, despite their relatively higher fees compared with Chinese investment banks, is that the international banks have the relationships with investors and funds in Europe, the US and the Middle East to market these bigger deals.
The buyers of CATL equity in Hong Kong, for example, included US investor Howard Marks’ Oaktree Capital Management, an investment vehicle backed by the Italian industrialist Agnelli family, and the Kuwaiti sovereign fund.
The listings — or share sales — also point to another shift for Chinese companies: the use of Hong Kong as a fundraising hub for overseas expansion.
“Chinese companies have a huge need for capital.
There has to be a reason why Beijing has been so interested in directing capital flows down there,” says Roach, the former Morgan Stanley Asia chair.
Chinese companies, especially those in the new technology space emphasised by Beijing policy, are rapidly expanding abroad and need to raise and hold capital outside of mainland China’s capital controls.
This is especially important as mainland China teeters on the edge of a damaging deflationary cycle and consumption remains weak, forcing fast-growing companies to find new markets abroad to maintain their pace of expansion.
New York would have been the traditional place where companies such as Alibaba raised offshore funds, but the threat from the Trump administration of “delisting” Chinese companies due to national security or data issues has made it less of an enviable position.
Meanwhile, Shanghai, inside the mainland’s capital controls, has failed to emerge as an alternative international finance hub as financial authorities prioritise stability over liberalisation of the equity markets.
Hong Kong’s lack of capital controls and US dollar-pegged currency, alongside the recent drop in the so-called AH premium whereby Chinese companies trade at a discount in Hong Kong, has spurred more mainland companies to follow suit.
As Chinese capital has poured into Hong Kong this year, the city’s trading is hitting records.
All 20 of the exchange’s top trading days by volume are in the past 12 months, according to data from HKEX.
Some foreign investors are also returning to the Hong Kong market for China exposure and to diversify their portfolios away from the US.
But the bulk of the action in Hong Kong is from the mainland.
Chinese investment into Hong Kong’s stock market hit a record high this year as mainland investors funnel money into businesses listed in the city, helping to drive the Hang Seng index to an almost 30 per cent year-to-date return, making it among the world’s best-performing indices.
Hong Kong’s market has been boosted by further policy support from Beijing.
In January, central bank governor Pan Gongsheng said at a conference in Hong Kong that China would “increase the proportion of national foreign exchange reserves allocated in Hong Kong”.
As a result, China’s institutional investors have a green light to put money into Hong Kong’s stock market.
“For money to come [to Hong Kong] is definitely politically correct,” says Hao Hong, chief investment officer at Lotus Asset Management and the former head of a Chinese brokerage.
Chinese investors are buying technology companies such as Alibaba and Tencent that are unavailable on mainland bourses.
The “DeepSeek moment” this year spurred a global revival in interest in China tech, nowhere more than in the country itself.
Beijing has pushed China’s largest insurance companies and mutual funds to invest more in the country’s stock market.
Businesses such as Ping An have since put tens of billions of US dollars into high dividend-yielding state-owned banks listed in Hong Kong.
Trading activities are “really at an all-time high”, says Lee, the Hong Kong lawmaker.
“We have never seen this on the exchange.”
The flow of Chinese capital and companies into Hong Kong has been accompanied by the arrival of large numbers of white-collar mainland workers, in many cases leaving the country’s top universities or large cities for jobs in the territory.
Figures from the Hong Kong Immigration Department show that a new visa scheme set up at the end of 2022 to attract top-tier talent led to 39,010 approvals for mainland Chinese applicants last year, exceeding the 35,058 approvals under the territory’s general employment visa scheme for foreigners.
Residential rents in prime areas have rebounded back to the steep levels for which Hong Kong is renowned internationally.
Hong Kong has become the laboratory for much of China’s financial reform and experimentation, not least as the setting for Beijing’s plans to internationalise the use of the renminbi.
In its 2024 budget the government said that some 75 per cent of offshore renminbi was traded in Hong Kong.
Efforts have focused on growing the renminbi’s use in trade settlement and trade financing.
Progress on this front has been slow but geopolitical shifts could accelerate uptake of China’s currency, analysts at Goldman said in a recent note.
“Our view is that China’s Rmb internationalisation will be somewhat different from your typical currency internationalisation in the sense that China has capital controls,” says Hui Shan, chief China economist at Goldman.
“A plausible solution is to grow your offshore renminbi market . . . That will certainly benefit Hong Kong.”
Hong Kong has also reprised its central role as a hub for issuing renminbi-denominated debt offshore.
Since 2022 annual issuance has soared past the previous record set in 2014 as both Chinese and foreign companies take advantage of low funding costs for renminbi.
Meanwhile, Hong Kong’s financial infrastructure is growing to meet Beijing’s needs.
Hong Kong’s exchange and monetary authority announced a plan in March to build a new securities depository similar to Europe’s Euroclear and Clearstream, which would allow China to reduce its dependence on western financial institutions and avoid a Russian-style asset confiscation scenario.
And in digital assets the city has been working to license Hong Kong dollar stablecoins, which many believe serve as a trial for how a future renminbi stablecoin could work within China’s tight system of capital controls.
The stablecoin trial — known as the “sandbox” — in which Standard Chartered, JD.com and others have applied to run coins backed by local currency reserves could just as easily apply to Hong Kong as a whole in the eyes of China’s financial authorities and regulators.
Despite all this, Hong Kong’s trajectory is unlikely to be straight towards the top right.
Western financial institutions remain wary of overinvesting given the scope for geopolitical tensions between the west and China to spill over into the territory.
The high-profile national security trial of Apple Daily founder Jimmy Lai along with the regular issuance of bounties for Hong Kong protesters abroad are reminders that politics can never be far from businesses’ mind.
[Hong Kong is a] completely different world now.
Eventually Hong Kong will become the Manhattan of China
And some in the business community fret that Beijing’s high-profile protests over local conglomerate CK Hutchison’s sale of its share of its international ports portfolio undermine the freewheeling business environment in which Hong Kong corporates have thrived.
More broadly, the shackling of the fortunes of Hong Kong to the Greater Chinese economy has left the territory vulnerable to the health of the mainland economy, which is nearing a deflationary cycle, to a greater extent than before.
“The ups and downs of the Chinese economy are very tightly linked to the ups and downs with the Hong Kong economy,” says Roach.
Black Sheep Restaurants may see business improving, but much of the rest of Hong Kong’s retail and hospitality sector is suffering, in large part down to the difficulty of competing with nearby Shenzhen, accessible via the local metro, and its deflationary pricing.
The latest GDP figures for the territory show that the economy grew by about 3 per cent for the first and second quarters of this year, while retail sales declined for 14 consecutive months amid lower spending by tourists before returning to a slight growth more recently.
This has led some to suggest that Hong Kong’s financial industry is detaching from the rest of its economy — with an uncertain impact on its status as a global city.
Hong Kong is a “completely different world now”, says Raymond Yeung, chief economist for greater China at ANZ.
“Eventually Hong Kong will become the Manhattan of China,” he adds.
“On Sunday[s] you won’t see people staying here.”
0 comments:
Publicar un comentario