China’s recent decisions on Hong Kong’s national security legislation and US sanction threats have become the focus of global media attention. One of the key questions everyone is asking is whether these developments will affect Hong Kong’s role as an international financial centre. In this regard, I wanted to share some thoughts.
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Hong Kong has played an irreplaceable role in China's economic development in the past few decades, and it has become a leading global financial centre. The success is largely hinged upon the unique construct known as “One Country, Two Systems”. As difficult as the recent challenges may appear, I do not believe that they will fundamentally change Hong Kong: it is set to be more relevant than it has ever been.
Why is Hong Kong still so important as an international financial centre?
For over 40 years, China's economic reform has actually been a continual process of participation in globalisation. China has evolved its physical connections with the world through its transportation and communication links; it has embedded itself into global supply chains, becoming a major international manufacturing and trading partner; it has begun to place an increasingly important role in global capital markets; and in technology, China has arguably now become the world leader in AI, quantum computing and in the tools and systems that are going to shape our world in the decades ahead.
And Hong Kong has been pivotal throughout this process, at each and every stage; at the same time Hong Kong’s function has gradually evolved and upgraded: from shipping and aviation to direct investment in the construction of coastal manufacturing centres, to vital capital connections into and out of China. And in the case of those financial connections, they begun as simple one-way facilitations but have now morphed into a deeply rooted, connected and complex financial ecosystem, on which the real economy, in China and globally, is reliant.
Hong Kong today acts as a regional nerve centre for investors, companies and risk managers wanting access to capital and opportunity into and out of China: local custody, net settlement, closed-loop funds and mutual supervision assistance allow the very different capital markets of China and the West to co-exist, whilst still respecting their different constructs and local needs.
In the process of creating value for China, Hong Kong has become one of the most important financial centres for global financial markets.
And what of the proposed National Security Law, how will this affect the status of Hong Kong as an international financial centre?
Despite much comment to the contrary, I do not believe the introduction of the National Security Law will have substantial long-term negative impact on Hong Kong as an international financial centre. Why so? Well first, the proposed law is being introduced with some reluctance and resignation, as a result of the confluence of a specific set of circumstances. Although the right to directly legislate on Hong Kong's national security has existed since 1997, China has historically deferred to Hong Kong to enact it and has now chosen to act on its own only after facing some significant destabilising developments in Hong Kong since 2019, as well as the rising geopolitical tensions with the US. The apparent reluctance leads me to believe that the legislation will be narrowly tailored to address specific national security concerns and is not part of a concerted effort to undermine or erode the existing political and personal freedoms and the rule of law enjoyed by the Hong Kong people.
Secondly, "One Country, Two Systems" remains unequivocally in line with China's developmental interests. Once China is comfortable that ‘One Country’ (i.e., national security) can be safely preserved, China will likely do more to help enhance ‘Two Systems’, because it is not only good for Hong Kong, but also in the fundamental interests of China.
At it stands, the legislative process of the law is still ongoing and important issues are yet to be worked out, i.e. how the new law will be enforced, prosecuted and adjudicated and whether it will be based within Hong Kong’s existing legal framework. A balance needs to be struck in helping ease anxiety in Hong Kong and internationally on the one hand, and giving China some confidence that the law will not be “toothless”, on the other. I believe that foresight and wisdom will prevail in helping find the right solution.
Third, the new law is unlikely to bring about any meaningful changes to the fundamentals of Hong Kong’s international financial market or to the way it operates. The security law will have no bearing on any laws and regulations governing commercial activities, contractual arrangements, financial transactions, capital flows, dispute resolutions and the movement of people/talent and flows of information and data. In many ways, China continues to reform its domestic financial systems by modelling itself upon Hong Kong and has seen sustained success in this to date.
Will potential "sanctions" actions affect the status of Hong Kong's international financial centre?
China-US relations have reached a special crossroads and most expect tensions to continue, particularly set against the backdrop of US presidential elections and the challenges of operating through the Covid-19 pandemic. With the national security law being used as a convenient pre-text, Hong Kong is unfortunately being used as a political football. So the analysis must centre on whether the political footballing could hurt Hong Kong and whether Hong Kong can cope.
Whilst the US clearly has many levers it could pull, much of the debate to date has centred around the impact of revoking Hong Kong's special trade status. Preliminary consensus is emerging that the impact would actually be quite manageable. As stated by Hong Kong Financial Secretary Paul Chan in his blog last week, the annual amount of local manufactured goods exported to the US accounts for less than 2 per cent of Hong Kong’s manufacturing output; and less than 0.1 per cent of total export value.
It may be that the US is actually hurt harder than Hong Kong as the US's trade surplus with Hong Kong in the last decade has been among the biggest of all its trading partners, totalling almost US$300 billion. Similarly, Hong Kong unilaterally grants visa-free treatment to all US citizens, while holders of Hong Kong passports do not receive the same visa-free treatment for entry to the US.
Looking at Hong Kong as an IFC: for any international financial centre, the most critical elements include the free flow of capital and information, an established and trusted rule of law, internationally accepted language and cultural norms, proximity to large economies and abundant capital. In this regard, it is hard to see that the US has the real motivation, or the appropriate tools to systematically undermine Hong Kong without also creating serious collateral damage for its own shores and its allies’ interests.
We are absolutely living in challenging times. It is certainly not Hong Kong’s choice to become a political football, but we will have to deal with it. We have been there before and we will come out thriving like before. Looking beyond the current challenges, I am confident that brilliant, tiny Hong Kong will continue to play a major role, anchored in China, and connecting with the world, meeting the needs of those in both the East and West. This is not the end of Hong Kong as some may fear, only another of its many reinventions.
Source: HKEX
