Hong Kong as a Financial Services Centre

Many years ago, prior to the handover in 1997, I lived in Hong Kong and worked in the financial services sector. A common topic of conversation involved the speculation about Hong Kong’s role in the future. Would Hong Kong continue in its traditional long term role as the gateway of business and investment into mainland China? Would China respect and preserve Hong Kong’s freedoms, laws and practices? Would Hong Kong continue to prosper and grow?

Or would Hong Kong become irrelevant once China was able to build its own mechanisms and markets to attract international capital and, more importantly, to provide confidence to foreign investors and businesses?

Fifteen years later, this question has largely been answered, at least in the short term. Amidst the economic growth story of China, Hong Kong has emerged as not only the gateway for investment in the mainland, but as a world class financial centre in its own right.

A low-tax haven, modern metropolis and fusion of east and west, Hong Kong has flourished as a financial services centre and banking hub for international corporations. As an example, Hong Kong now has one of the highest concentrations of banking institutions in the world, with 71 of the world’s largest banks managing their Greater China operations from Hong Kong. And, with around 8000 skyscrapers, Hong Kong almost doubles the equivalent measure in New York.

Hong Kong has been anointed by the Chinese Government as “China’s international financial services centre” and plays an important role in managing the internationalisation of the RMB, one of the world’s most significant “mega-trends”.

To prove the point, Hong Kong hosts the largest pool of RMB liquidity outside the mainland, with offshore RMB deposits reaching nearly RMB600 billion (70 per cent of which is held by corporations, with 15 per cent from overseas) and the rapidly growing demand for RMB financing and investment will solidify Hong Kong’s position as the main market for “dim-sum bonds” outside the Mainland.

In 2011, there were 81 issuers of dim-sum bonds combining to a value of RMB100billion, three times that of 2010 and projected to grow rapidly in the future.

Hong Kong’s reputation as a global financial industry leader is underpinned by its ability to offer services to non-resident third parties and its banking sector plays a crucial role in establishing Hong Kong as a major loan syndication centre in the Asia-Pacific region. Hong Kong is the second largest banking centre in Asia (in terms of the volume of external transactions), placing it second behind Japan, and the Hong Kong dollar was the eighth most traded currency in the world (by volume) in 2011.

Free market, with a cushion

As a free market international economy, Hong Kong is highly dependent on international trade and finance and could have been vulnerable to the economic shocks encountered in other countries (notably the US and Europe) as a result of the GFC. However, strong levels of growth and economic activity trickling down from Mainland China has cushioned Hong Kong’s economic slowdown.

Hong Kong’s banking centre emerged from the crisis in much better shape than the rest of the world. Its collective capital ratio rose to 15.9 per cent in June 2011 and its tier-one capital adequacy ratio rose to 12.5 per cent. The potential draconian restrictions on riskier practices that are likely to be faced by the European and American financial sectors will create opportunities for Asian markets to capitalise further, with Hong Kong leading the way.

In December 2011, the World Economic Forum’s fourth annual Financial Development Report Financial Stability Index ranked Hong Kong in first place as the world’s top financial hub, above the US and the UK.

Hong Kong was the first Asian financial centre to achieve this position, bolstered by strong scores in non-banking financial services such as IPO activity and insurance. At the end of August 2011, 1,463 companies were listed on the HK Stock Exchange with a market capitalization of HK$19,432 billion, of which 617 were Mainland enterprises which have raised a combined value of HK$3126 billion in the Hong Kong market since 1993.

As a leading funds management, hedge fund, banking and ETF trading centre, Hong Kong provides the regulatory environment of a Western democracy, but with access to the rapid growth and wealth of the Greater China and Asian regions.

Five advantages

Hong Kong is a gateway to over 3 million high net worth individuals in the Asia Pacific, with wealth totalling approximately US$9.7 trillion dollars, significantly more than their equivalent European counterparts. It is interesting to note that Hong Kong was actually one of the first jurisdictions worldwide to allow hedge funds to be sold to retail investors.

Hong Kong’s competitive advantage stands out in five key areas: its people, business environment, market access, infrastructure and cost competitiveness. The foundations of such a business environment are established in its freedom, English common law system, robust regulatory regime, a simple and transparent taxation system and a time zone that links American and European markets with the Asia Pacific region.

Hong Kong’s future as China’s international financial services centre seems assured. On my regular visits back to Hong Kong, I am delighted by the local confidence shown in Hong Kong’s economic future. Many expatriates now make plans to retire there, an idea which would have been laughable 15 years ago, and property prices are rising rapidly, a sure sign of local optimism.

A recent survey of over 450 UK investment bankers showed that more than two thirds believed that Hong Kong, Shanghai and Singapore would be the world’s top financial centres by 2022.  All of these cities are within a short flight of Australia.