Editorial

Hong Kong: 20 years since the handover

In July 1997, the United Kingdom transferred sovereignty over Hong Kong to the People’s Republic of China after 150 years of British control. The event marked a new era for Hong Kong and the effective end of the British Empire. In his farewell speech, Governor Chris Patten said: “The story of this great city is about the years before this night and the years of success that will surely follow it.”

In the 20 years since the handover, ‘Asia’s World City’ has thrived. The population has expanded from 6.5m to 7.4m and its economy has grown from strength to strength as its housing, tourism, trading and finance sectors have boomed.

The latter remains Hong Kong’s primary industry. Buoyed by its economic strengths, including a sound banking system, virtually no public debt, a strong legal system, ample foreign exchange reserves and rigorous anti-corruption measures, Hong Kong is home to the highest concentration of banking institutions in the world.

Two-way relationship

Whilst these attributes have certainly aided Hong Kong’s success, it is arguably the territory’s role as the gateway to China that has been its most valuable asset since the handover. Its position has seen multinational organisations from around the world flood into Hong Kong, using it as a springboard to take advantage of the boom in China.

This has also turned the territory into one of the world’s leading treasury centres. Corporates from the US and Europe with a significant presence in China have set up regional treasury centres in Hong Kong giving a permanent treasury presence in the market and gaining greater visibility and control over their cash flows.s

Although remaining a gateway to China, Hong Kong’s role is changing. More than simply acting as a springboard for multinationals heading into China, Hong Kong is now a conduit between China and the rest of the world and a base for Chinese corporates going global. And just as international corporates set up regional treasury centres in the territory, Chinese multinationals are doing the same. The Hong Kong Monetary Authority has recognised this opportunity to further enhance Hong Kong’s treasury centre credentials. It has revised the taxation rate for locally domiciled treasury centres, making the territory more attractive and staving off its long-time rival, Singapore, and its emerging challenger, Shanghai.

One country one financial system

Hong Kong’s role as the gateway for mainland China’s trade, investment and finance only looks set to increase over the coming years. China’s ambitious ‘Belt and Road’ will see the territory become a key financing hub and M&A destination for Chinese corporates.

Elsewhere, initiatives such as the Shanghai-Hong Kong Stock Connect, and the recently launched China-Hong Kong Bond Connect, highlight the important role the Chinese see Hong Kong having as a link to the rest of the financial world. Hong Kong’s position as the world’s foremost RMB hub also demonstrates that China sees the territory acting as a vital cog in its plans to internationalise the currency.

But the territory’s biggest advantage may also be its biggest disadvantage going forward; Hong Kong’s fortunes are becoming even more intimately intertwined with what happens in China.

The recent downgrade of China by Moody’s, and the subsequent downgrading of Hong Kong, highlights this. Explaining the downgrade, Moody’s said that “credit trends in China will continue to have a significant impact on Hong Kong’s credit profile due to close and tightening economic, financial and political linkages with the mainland”.

Some commentators have also raised questions about what Hong Kong’s position will be once China fully opens, making its megacities, such as Shanghai, potential finance centres that will eat into Hong Kong’s market share.

A lot needs to happen before this is the case though. Indeed, from a treasury perspective, Shanghai remains a viable treasury centre location for only a handful of foreign corporations. Hong Kong, therefore, remains just as important, if not more so, than it was 20 years ago.