The recent unrest in Hong Kong has put its status as Asia’s financial capital in danger. Can it survive this turbulent spell?
It’s a 14-minute journey from Futian station in Shenzhen to West Kowloon station in Hong Kong on one of China’s new high-speed trains. This section of the line, which connects to Beijing 1,500 miles away, was opened in 2018. As a result you can leave the former British colony after breakfast and be in Tiananmen Square in time for dinner.
Of course, this isn’t the only way the centre of Communist Party power has got much closer to the lives of people of Hong Kong of late. The introduction this summer of the National Security Law – permitting the extradition of Hongkongers to China with minimal judicial oversight – has subverted the Sino-British Joint Declaration of 1984 and demonstrated once and for all that Beijing is not interested in playing nicely.
‘It is one of the biggest assaults on a liberal society since the Second World War,’ opined the Economist, under the headline ‘A safe harbour no more’.
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Eight minutes’ drive from the Kowloon terminus is another sign of the times: a branch of UBS, the Swiss private wealth giant, which opened in 2016. It’s no coincidence that it’s here, even though UBS already had its main Hong Kong hub in the IFC Tower 2 in Central, across Victoria Harbour.
‘They discovered it was too intimidating for Chinese clients to come over to Hong Kong island and go to the IFC on the 52nd floor,’ says one financial services veteran. A senior investment banker, who asks not to be named, speculates that UBS may have been responding to a different impulse on the part of their mainland customers: ‘I wouldn’t be surprised if some of them said, “I don’t want to go that effing high-profile IFC, where the Hong Kong Monetary Authority is – let’s do it more discreetly in Kowloon.”’
Whatever the reason, UBS isn’t alone: Credit Suisse and Morgan Stanley have both relocated to Kowloon from Central. The shift of these institutions all follows the centre of financial gravity in Asia.
According to a family offices presentation from a trio of Hong Kong financial bodies, including that monetary authority, the special administrative region is now part of the Guangdong-Hong Kong-Macao Greater Bay Area, a region with a population of 70 million – more than greater Tokyo, the San Francisco bay area and New York City combined – and home to 17,000 UHNW families.
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But that’s a fraction of the 80,000-plus UHNW families in Greater China, according to the presentation. So it makes sense that ‘the biggest teams in private banking in Hong Kong are all ones covering mainland China’. The jurisdiction banks just north of $3 trillion, of which private banking and wealth management account for $1 trillion.
In terms of cross-border assets, it is second only to Switzerland, managing $1.2 trillion to Switzerland’s $2.3 trillion. Singapore, long snapping at Hong Kong’s heels, is third on $1 trillion.
Unsurprisingly, the Hong Kong marketing material highlights in bold sections of Article 112 of the Basic Law: ‘No foreign exchange control policies shall be applied in the Hong Kong Special Administrative Region. The Hong Kong dollar shall be freely convertible… The Government of Hong Kong Special Administrative Region shall safeguard the free flow of capital.’
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Yet despite the recent bad news, you don’t have to look far to find those who will stand up for Hong Kong. ‘Warren Buffett says never bet against America,’ says British-educated Patrick Tsang, third-generation principal of a Hong Kong-headquartered family office, Tsangs Group.
‘I would say to everyone, don’t bet against Hong Kong.’ Tsang accepts that the unrest will have caused business to divert to Dubai or Singapore, but he backs the dynamism of the economy and the work ethic of the people.
‘Highly educated, bilingual and bicultural, we’re the real deal in terms of the mix between East and West,’ says Tsang, whose grandfather made the family’s fortune with Chinese restaurants in the UK before moving into property in China.
Hong Kong’s privileged position as the gateway to China is flagged up by another resident with a background in finance: ‘Look at the stats,’ says Lucy Sutro, a wealth manager who has lived in Hong Kong since moving there in 2006 with Fleming Family & Partners.
‘Something like 50 per cent of all inward investment to China comes through Hong Kong. It’s incredibly important to China and Chinese businesses – it’s where they get the capital.’
With the US becoming a more challenging environment for Chinese-listed entities, Hong Kong’s importance is growing. Already the market capitalisation of its listed entities has increased fourfold to more than $4 trillion in 15 years, making it the fourth biggest in the world.
‘Hong Kong will become more and more important as the place where you list,’ adds Sutro, who points to the restrictions in place on mainland China. ‘While exchange controls exist and until there’s a free market, they’re going to need Hong Kong.’
Qin Xu, from Boston Consulting Group in Hong Kong, highlights the ‘very strong pipeline’ of IPOs ‘originally in the US market’ that are coming to the territory, saying they will augment its position as ‘one of Asia’s most important financial markets’. (Currently 230 Chinese companies worth $1.8 trillion are listed in the US.)
Backed up by the maturity of its institutions, the Basic Law and regulatory environment, Hong Kong’s position is safe, Qin says: ‘This market is probably the closest one in AsiaPacific to the rest of the world. It will take other markets time to catch up.’
Over the past 20 years most Asian countries have made a start, growing in-country investment banking infrastructure.
Hong Kong remains the regional HQ for Greater China and Taiwan, I’m told, while Singapore serves as a hub for South East Asia. Most Chinese firms list first in Shanghai for the domestic market and then in Hong Kong for ‘non-US trading’.
‘A Chinese company that is very big does not want to be listed in Shanghai only,’ says one financier. Again Hong Kong benefits from its particular position vis-à-vis China in terms of geography, culture, language and legal status: ‘Hong Kong is like their Zurich and their New York.
At the same time it’s theirs – but it’s not completely theirs. They like that distinction.’ But people are leaving Hong Kong. According to Henley & Partners, which provides citizenship and residency advice to HNWs, the number of Hongkongers paying them for ‘the optimal investment migration solution’ doubled from 2018 to 2019.
‘Smart, savvy people have seen the writing on the wall,’ says one Hong Kong watcher. ‘They don’t wait for the tanks to appear before they work out their escape route.’
This chimes with the view of another veteran of the region. ‘On the surface everyone’s saying, “We’re still committed to Hong Kong and having people and an office there, it’s still a great hub for the Greater China nexus,” but in reality expats want to get out. These people are going to move to Singapore because you don’t have to deal with this shit.’
Simon Lints, who is based in Singapore and is a strategic adviser to Raffles Family Office, which has a presence in Hong Kong, Singapore, Shanghai and Taiwan, puts it in rather less demotic terms.
‘You’re seeing a lot of Chinese family offices opening up here,’ he says. ‘Singapore wins in terms of the big family offices, like the Dysons of this world, relocating.
Singapore is independent, very well run, the regulatory side of it is strict but very fair – and it’s a safe place.’ Spear’s columnist Annamaria Koerling, whose Delfin Private Office is looking to ‘get boots on the ground’ in Asia, has also been eyeing up Singapore. Five years ago, she says, ‘Hong Kong would probably have ranked slightly higher.’ Not any more.
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Some discount the fear of capital flight, pointing out that Hong Kong’s HNWs will probably already have several bank accounts, including one domiciled in Singapore. ‘Your banker’s here and so on, but legally it’s out of Singapore. Why? Because it’s safer,’ says a Hong Kong banker. ‘It’s been that way for 20 years.’
Yet even with the recent legal changes, Hong Kong is still a Utopia when compared to the mainland: ‘Say you’re a second- or third-tier mainland businessman,’ asserts the same banker. ‘Do you really want the bulk of your spare cash in Shanghai? No. You also don’t want it all the way in Geneva. [Hong Kong] very pragmatically serves everyone’s purpose.’
And, in some respects, the clampdown may even help. ‘Wealthy individuals do not want to be in an airport where there are mass demonstrations,’ notes one wealth adviser in the region.
Well, now they won’t have to worry. It’s an assessment shared by Lints.
‘There’s a lot of positivity based on the fact that what they have now got is a bit of stability,’ he explains. ‘There’s not going to be any more rioting.’
This poses the unexpected possibility that Hong Kong will do better – heedless of the condemnations from the West, and even perhaps if some money flies south.
But Singapore is hardly beyond the reach of Beijing’s influence, which means the biggest money will probably follow the passports or residency requirements of departing Hongkongers.
Henley & Partners confirms that around a third of its Hong Kong clients are looking at Asia Pacific – with Australia at the top of the pile. Another third are heading for Europe, notably Cyprus and Malta; the rest are London-bound or eyeing up the Caribbean. More may follow.
‘If you’re running an Asian mandate on a global equity portfolio you’re probably still in Hong Kong,’ says Lucy Sutro. ‘That will continue until there’s a whisper that your industry is no longer safe. Then everything changes.’
Professor Michael Mainelli, co-founder of Z/Yen, the London-based think tank which compiles an annual power list of financial centres, makes an aligned suggestion.
‘Hong Kong needs to continue to be differentiated in order to thrive as an international financial centre,’ he says. But the signs are that Beijing is happy to erode that differentiation.
In 2019 many limits on foreign firms entering China’s $47 trillion financial services industry were lifted – Goldman Sachs and Morgan Stanley are among those to have moved in, while HSBC has been in China since 2006.
It’s part of China’s desire to professionalise its home financial services industry – just in time for its newfound wealth, which is coming down the tracks faster than one of its high-speed trains. Household wealth is due to increase by $14 trillion by 2023, reaching $35 trillion, according to Boston Consulting Group.
‘As an asset manager, we see locally that the regulators have wanted to increase the quality of their investment products,’ notes Andrew Hendry, head of distribution, Asia Pacific, at Aberdeen Standard.
‘In the last 12 months a lot of big banks have been encouraged to start up wealth management entities. It poses a challenge to the longer-term position of Hong Kong.’
The challenge is that soon, instead of popping over the border, much mainland cash may end up in the mandates of private bankers in Shanghai, Shenzhen and elsewhere.
‘Folks with $10 million, will they bother going to Singapore?’ asks Hendry, who warns: ‘The volume of Chinese makes it a big swing factor for Hong Kong.’ And then what for this gilded tranche of the Pearl River Delta? Neither fully Chinese nor fully foreign, neither free nor unfree, it may come second in too many races.
The 2020 Z/Yen index of international financial centres – based on 5,000 responses from finance professionals worldwide – ranks it fifth, behind Shanghai and Singapore, and down from third last year. Perhaps it doesn’t matter; it might bounce back.
Meanwhile, the Bentleys, Range Rovers and Ferraris will continue to purr across the border at Shenzhen, and quieten outside the offices of UBS in Kowloon.
This piece first appeared in issue 76 of Spear’s
Image credit: Pixabay
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