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Amid concerns over capital flight and effects of the national security law, economist Xia Chun makes the case for financial stability in Hong Kong and the city’s resilience as the world faces the pandemic’s second winter

By Liu Chenyao , Wang Jiacheng Updated Dec.1

People walk in Tsim Sha Tsui, Kowloon, Hong Kong, September 28

Despite doubts cast on the Hong Kong economy over claims of investor exodus and capital flight, the data suggests otherwise, says Xia Chun, chief economist at Noah Holdings, adjunct professor of finance at the University of Hong Kong and financial advisor to the Hong Kong Federation of Trade Unions.  

In an interview with China News Service, Xia explains why Hong Kong’s status as a global financial center is secure, and why the city will continue to attract investment and talent.  

China News Service: What are Hong Kong’s advantages for developing its economy?  

Xia Chun: Many assume that the main reason behind Hong Kong’s success is its adoption of common law, just like the UK and the US. But it’s not. Countries with common law systems don’t necessarily have well-developed economies. A country without common law can also develop well. The theory of common law as a determining factor of financial development used to be popular, but as researchers have since pointed out, these theories neglect historical factors. 
Hong Kong has a natural geographical advantage. When Britain occupied Hong Kong, the main consideration was that it was a highquality warm water port. Back then, Hong Kong was desolate but had rare natural advantages such as the depth and width of its port.  

Many might find it hard to imagine that Egypt and Cuba, which were financial centers a hundred years ago, both adopted civil law systems. So did the earlier financial centers of Amsterdam and Venice, as well as Tokyo, which before Hong Kong was the Asia-Pacific region’s financial center. 

Hong Kong’s most important geographical advantage is its proximity to the Chinese mainland. It has served as a two-way gate during China’s rise, playing a role similar to a gas station or a two-way toll booth.  

In addition, Hong Kong’s time zone is between New York and London, so it’s able to fill the gap left by other financial markets in a 24-hour global financial market.  

CNS: Why have some lost confidence in Hong Kong?  

XC: Hong Kong ranks seventh in the IMD World Competitiveness Ranking 2021, released in June by the International Institute for Management Development. Those who are bearish over Hong Kong would say its competitiveness seems to have declined, from second place in 2019 to fifth in 2020 then to seventh in 2021. But those who are bullish point out that Hong Kong took the top spot in government efficiency and second place in business efficiency, and both rankings are quite stable. What has dragged its rankings is economic performance, which has been impacted by the unrest over the extradition bill in 2019 and the Covid-19 pandemic. Besides, Hong Kong ranks first in the global normalcy index, recently released by The Economist.  

Many people often talk about the ideas of “two Hong Kongs” and a “tripartite economy.” The “tripartite economy” refers to traditional industries [construction, tourism and retail], finance, and real estate. “Two Hong Kongs” distinguishes the people who have benefited from the city’s economic development from those who have not, and the two groups have different views of Hong Kong’s future. Those who have benefited might see the positive side more, while the other group knows about the good side but cannot benefit from it, so they have a rather pessimistic view about the future.  

In fact, Hong Kong’s tripartite economy possesses remarkable energy for development, as well as ample room for adjustment, transformation and improvement.  

CNS: In recent years, the US has repeatedly intervened in Hong Kong affairs and urged foreign firms to leave Hong Kong. Has this impacted Hong Kong’s development?  

XC: Many believe that when the US announces a policy targeting a certain place, it will have an enormous impact. But we need to look at the data.  

Because of the impact of Covid-19, Hong Kong’s trade indeed slipped last year. But as a global financial center, Hong Kong’s IPO financing topped the world even in 2019, and ranked second to the Nasdaq in 2020. In addition, Hong Kong saw net capital inflows in 2019 and 2020. The Hong Kong dollar exchange rate is on the strong side of the convertibility zone. From April 2019 to 2020, the strongside convertibility undertaking was triggered 85 times. The Hong Kong Monetary Authority bought US$50 billion from the markets, the highest level since 2010. Hong Kong’s bank deposits rose 2.9 percent in 2019 and 5.4 percent in 2020 annually.  

According to data from the Hong Kong Securities and Futures Commission, the city’s asset and wealth management business totals nearly HK$35 trillion (US$4.5t). As of December 31, 2020, total assets of Hong Kong’s private banking and wealth management business rose 25 percent to HK$11.3 trillion (US$1.5t). The private banking and private wealth management business also recorded net fund inflows of HK$656 billion (US$84.2b), accounting for 29 percent of the yearly increase. These figures are unimaginable for those who are bearish over Hong Kong’s development as a financial center.  

From a long-term perspective, Hong Kong will be important to regional finance activity not only for the Chinese mainland, but also in the ASEAN region and greater Asia. Currently, Asia accounts for over 30 percent of global GDP, becoming one of the three pillars alongside the US and Europe. That level will rise to 40 percent, or even 50 percent. The economic scale is closely related to the development of the finance sector. As Asia’s financial center, Hong Kong’s finance sector will develop along with its economic expansion.  

CNS: Is it possible we will see European and US financial institutions pull out of Hong Kong?  

XC: A few foreign companies have left Hong Kong. But the media often focus on those that left instead of reporting on the newcomers. Some foreign companies that left Hong Kong actually moved to Shenzhen or Shanghai, where the market is broader. Tara Joseph, president of AmCham Hong Kong, said recently that the Hong Kong national security law does not negatively affect US-invested firms.  

According to data released by the Hong Kong Special Administrative Region’s Financial Services and Treasury Bureau, 78 of the world’s top 100 banks operate in Hong Kong, while 13 of the global top 20 insurers operate here.  

Starting in May 2020, there have been market rumors that Hong Kong residents are allocating capital to Singapore. But according to the latest data, Singapore’s non-resident deposits increased by only HK$14.8 billion (US$1.9b) between May 2020 and May this year, up 4.1 percent. And data from the Hong Kong Monetary Authority showed local deposits increased by HK$1 trillion (US$128.5b) during the period, with a rise of 7.2 percent; in the meantime, Hong Kong dollar deposits, the most representative measure, rose 8.8 percent to around HK$610 billion (US$78.4b).  

Therefore, some firms might leave, but it’s impossible to see the worst-case scenario of an all-out exodus. Some of those which left might come back as well.  

CNS: It has been more than a year since the national security law went into effect in Hong Kong. Has it changed Hong Kong’s status as a global financial center?  

XC: Hong Kong’s national security law has barely impacted the financial sector, as finance needs a very stable environment. The institutions which publicly stated they would leave either had rocky operations or had strategies unfit for Hong Kong’s corporate environment. There were also those that had divided views within their management, but it has been played up by media. 

As the data suggests, Hong Kong’s status as a global financial center is more stable after implementing the national security law. On the one hand, Hong Kong has become more stable, which helps both suppliers and demanders of funds focus on investment and ensures a clearer and more optimistic view of the future. On the other hand, Hong Kong’s interest rates are better than the international market, and China’s economic growth and investment opportunities are also better than other major economies.  

Although the markets have seen the effects of anti-monopoly and other regulations, similar policy risks surfaced in 2015 and 2018. Over the past five or six years, foreign investors have been, for the most part, actively buying Chinese stocks and bonds.  

In the past, quite a few voices were bearish over Hong Kong and the Chinese mainland, saying the Chinese economy was a big bubble or a pressure cooker, which might burst at any time. They have been proven wrong.  

Of course, there is room for Hong Kong to play to its strengths. Hong Kong’s biggest strength is its capability for IPO fundraising. Second, Hong Kong has large stock and bond markets and securities, asset management and insurance businesses. Besides, there is a lot of new space for developing Hong Kong’s finance sector, such as green bonds, yuan financing and trading, Belt and Road investment and financing platforms, limited partnership funds, wealth management business, and so on. The Hong Kong government has rolled out a slew of support polices. These create space for Hong Kong’s financial prosperity.  

In addition, the coming three to five years will see the completion of some of Hong Kong’s key infrastructure projects, such as the Kai Tak Development Area and the West Kowloon Cultural District, as well as subways, roads, bridges and tunnels linking the New Territories, Kowloon and Hong Kong Island. Improved infrastructure will make Hong Kong residents’ lives and work more convenient, amplify Hong Kong’s advantages and attract high-end talent, which will offer strong support for Hong Kong’s economic and social development in the future.  

Looking forward, as long as Hong Kong boldly pursues reform, advances in the right direction, fast-tracks its integration with China’s development, and embraces new ideas such as establishing development as the priority and livelihood as the foundation, as well as ensures an efficient market and an effective government, its annual GDP growth is likely to reach 3 to 4 percent in the coming 20 years.  

This article was originally published by WE TALK, a China News Service production. Reprinted with permission from CNS 

A view of Hong Kong’s Victoria Harbor

People cross the street in Central, Hong Kong, May 18