Our Opinion: 2019

Hong Kong’s perfect storm

The powers that be might shrug off popular discontent, but they will listen to money. That explains Hong Kong’s decision to shelve a controversial extradition bill. Plans to allow residents to be sent to face mainland courts have sparked mass protests that ultimately forced Carrie Lam, the city’s leader, to suspend the bill indefinitely. Yet that gesture did not calm the unrest. Organisers claim that up to two million people, nearly 30% of Hong Kong’s entire population, turned out last Sunday regardless.

China’s leaders do not want to kill the goose that lays the golden egg. Hong Kong accounted for about 12% of the mainland’s exports last year and is the single largest source of realised foreign direct investment” to China. Its stock exchange gives mainland firms an independent channel to international capital outside New York or London.

‘Asia’s World City’ has long been an attractive destination for international investors wanting to buy ‘red chips’: mainland firms listed on the Hong Kong exchange, such as tech giant Tencent. Red chips offer exposure to the world’s second-biggest economy, but with a predictable legal system and an expectation of corporate transparency.

Under the ‘one country, two systems’ framework instituted after its return to China in 1997, Hong Kong has retained significant autonomy over its own affairs. Yet recent years have brought a creeping China-isation. The latest drama comes against a fragile economic backdrop. Growth in the first quarter was the slowest in a decade and rocketing property prices have stoked discontent. But previous bets against the city have proved wrongheaded. Those who sold Hong Kong property before the 1997 handover are seriously out of pocket.

Washington’s decisions could prove just as important as Beijing’s. The US recognises Hong Kong as having a ‘special status’, which exempts it from Trump’s tariffs. The Hong Kong dollar is pegged to the greenback. Yet with a trade war raging, moves are afoot in the US Congress to bring those cosy arrangements to an end. The Fragrant Harbour’s role as the world’s third-biggest financial hub can no longer be taken for granted.

British investors now have another way to bypass Hong Kong’s financial markets. A link between London and Shanghai went live this week. Shanghai-listed firms will now be eligible to take a second listing in London. UK companies can also sell shares in China, although red tape means that the system remains limited for the time being.

The latest development underlines the threat to Hong Kong’s financial status from the likes of Shanghai and Singapore. With mounting instability and fear in Hong Kong and regional competitors upping their game, the city faces a perfect storm.

4thJuly 2019