Regional Focus

Hong Kong remains resilient in spite of challenges

Published: Mar 2021

Hong Kong’s economy took a hit in 2020 following months of social unrest and the impact of COVID-19. Despite its struggles, however, the city state’s standing as an international financial centre remains on a solid footing.

Hong Kong skyline through a fisheye lense

After a difficult 2020, Hong Kong is hoping for better fortunes in the lunar year of the Ox. Like the animal – determined and dependable – Hong Kong’s financial services industry, and its role as an international financial centre, continue to hold strong and show resilience in the face of a number of challenges.

The city state has experienced crises before – the global financial crisis (GFC), the SARS pandemic, the Asian financial crisis – but in 2020 it experienced its greatest economic contraction in more than 60 years. In a research note, Chen Jianghui, an economist at Bank of China (Hong Kong) predicted that Hong Kong’s contraction for 2020 will be in the region of -6%, far greater than the -2.5% of the GFC, and also the -5.9% from the Asian crisis of 1997. “Looking into 2021, risks and opportunities coexist,” Chen states, adding that the outlook for the year ahead is more positive, with GDP growth expected to be up to 5%.

Like many markets, Hong Kong’s service economy came to a standstill in the wake of the pandemic. However, despite the hit to restaurants, shops, and the tourism sector, for example, the financial markets have been less affected. In fact, Hong Kong’s position as an international financial centre has remained strong, despite the challenges of the pandemic and the protests.

A spokesperson for the Hong Kong Monetary Authority (HKMA) agrees: “Despite the challenges posed by social unrest and the COVID-19 pandemic in the past year or so, Hong Kong’s monetary and financial system, as well as our role as an international financial centre, remained intact.”

For example, throughout the disruption, the linked exchange rate system, which pegs the Hong Kong dollar to the US dollar within a tight range – continue to work well, and the exchange rate remained stable. Also, according to the regulator, there have not been any significant outflows from the Hong Kong dollar or the banking system. “On the contrary, we have seen more than US$50bn of inflows into the Hong Kong dollar since April,” the HKMA spokesperson tells Treasury Today Asia, adding that bank deposits grew 5.4% in 2020.

And despite the uncertainty and speculation that surrounded the suspension of Ant Group’s initial public offering (IPO) in November 2020, (which was planned as a joint offering with Beijing), Hong Kong’s status as an IPO venue does not seem to have been negatively impacted. In fact, the capital markets have remained strong. “Hong Kong remains one of the top IPO centres in the world,” the HKMA spokesperson says, adding that in 2020 around HK$400bn was raised through IPOs, a 27% increase on the previous year.

Herbert Poenisch, a former senior economist at the Bank for International Settlements and Academic Committee Member at China’s Zhejiang University, comments how from the outset Hong Kong has defined its role as a financial intermediary between international investors and Chinese investors and borrowers – a role that shows no signs of abating. “Most important international financial intermediaries are based in Hong Kong and have not expressed their intention to leave,” he tells Treasury Today Asia. The city state continues to have a number of advantages over mainland China, such as its financial infrastructure conforming to international standards. Chinese financial infrastructure, Poenisch notes, differs from international best practice. He gives the example of China not joining Continuous Linked Settlement (CLS), which would reduce settlement risk. “While this continues, together with capital controls and lack of transparency, there will be a solid role for Hong Kong,” he notes.

Poenisch also points out the role Hong Kong plays with US dollar services, with Chinese entities, banks, enterprises, and high net worth individuals continuing to centre their US dollar business in Hong Kong. “The deep and liquid USD market in Hong Kong, together with real time gross settlement in USD, and the USD peg, guarantee USD funding and liquidity. During the USD shortage in early 2020, USD funding in Hong Kong proceeded smoothly. This was particularly important for Chinese banks, which fund their USD lending in offshore centres, first and foremost in Hong Kong.”

Also, Poenisch notes, banks resident in Hong Kong – notably Chinese banks – continue their international lending from Hong Kong rather than the mainland. He cites Q320 figures from the Bank for International Settlements that show cross-border claims from Hong Kong were US$1.66trn, compared with US$1.33trn from China and US$0.82trn from Singapore.

For the near future, it appears Hong Kong’s position as an international financial centre will remain unrivalled. “There are a number of runners-up to replace Hong Kong in financial intermediation, but none of them with the solid infrastructure and legal tradition, as well as wealth of experience as Hong Kong,” says Poenisch. He considers the alternative financial centres: “Shanghai, with its international financial district, as well as Shenzhen as the residence of financial innovation, but also Hangzhou, with the head office of Ant (Group), are worthy candidates. However, their development is subjected to central control and guidance by the Communist Partyh of China (CPC),” he says.

Domestically, the financial services sector is a key contributor to Hong Kong’s economy. Despite the impact of the COVID-19 pandemic, the industry has remained stable in recent months. Hong Kong’s financial services industry has been resilient, and consultancy EY conducted a study to determine how domestic banks were perceived by the general public in Hong Kong. They wanted to test whether the industry’s resilience was correlated with trust. They found that the sector could do better, in the mind of the public, with the ‘trust driver’ of ‘integrity’ – by providing more transparent information on transactions, and with ‘purpose’ – by demonstrating how it is having a positive impact on society.

Gary Hwa, EY’s Asia-Pacific Financial Services Regional Managing Partner, comments, “While trust in financial services in Hong Kong remains strong, local banks are facing headwinds from increased credit risk in the wake of the COVID-19 pandemic. In this environment, both financial inclusion and sustainability must remain key focus areas for the sector if they are to maintain these positive levels of consumer sentiment,” he tells Treasury Today Asia. “With wealth disparity continuing to widen, financial inclusion is more important than ever before and should form an integral part of the sector’s overall recovery efforts. Likewise, Hong Kong financial institutions can take a leading role when it comes to sustainability, to help ensure environmental recovery goes hand in hand with economic recovery.”

Financial institutions have also been taking a leading role in their services to multinational corporations (MNCs), and the transaction banks in Hong Kong have developed expertise in setting up regional treasury centres for them. This role was called into question, however, when Reuters reported in June 2020, citing anonymous sources, that some MNCs were considering moving their treasury operations out of Hong Kong, in the wake of the protests. It referred to one US retailer that was considering moving some of its cash management operations to Singapore, although this could not be verified.

The HKMA, however, maintains that Hong Kong is still an attractive location for corporate treasury centres. An HKMA spokesperson told Treasury Today Asia that “the COVID-19 pandemic has somewhat slowed the pace of multinational corporations (MNCs) setting up corporate treasury centres in the past year,” and the HKMA continues to receive enquiries from corporates, as well as requests from banks and industry associations to host webinars about setting up corporate treasury centres in Hong Kong. “In fact, there has been a surge of such requests in recent months, and the industry is expecting the momentum to return once the pandemic subsides,” the HKMA spokesperson said. The factors that attract corporates – the large talent pool, the favourable regulatory and tax environment, and connectivity with the region – remain unchanged.

It’s not just the HKMA that remains positive about Hong Kong’s strengths as an international financial centre; transaction bankers are also bullish about the future of the city state. Vishal Kapoor, Treasury and Trade Solutions Head, Hong Kong, Citi, points to the bank’s long history in Hong Kong, which stretches back to 1902, and says, “We are confident in Hong Kong’s future as a leading financial centre and our clients remain our priority. Our Treasury and Trade Solutions business continues to grow in Hong Kong where we continue to gain market share and are actively engaged in partnering with our clients as they further digitise their business. We also continue to lead the supply chain business in Hong Kong and across the region. Supply chain-backed trade assets in Hong Kong grew double-digits in 2020 despite a slowdown in trade in the region, reflecting strong growth in our trade business.”

Our Treasury and Trade Solutions business continues to grow in Hong Kong where we continue to gain market share and are actively engaged in partnering with our clients as they further digitise their business.

Vishal Kapoor, Treasury and Trade Solutions Head, Hong Kong, Citi

As well as continuing with its reputation as a centre for the trade of physical goods, Hong Kong has been building its reputation as an offshore renminbi (RMB) centre. According to SWIFT’s RMB Tracker from December 2020, Hong Kong was the top offshore RMB economy. The city state took the lion’s share of offshore RMB flows, with 74.9% of volume being processed through its RMB clearing centre. This was followed by the UK with a mere 6.14%, then Singapore with 4.21%.

Poenisch comments that uncertainty prevails in the RMB offshore market. He explains the official policy of internationalisation of RMB has put the emphasis on RMB use for trade and investment settlement for bilateral trade and investment between China and its partners. “What is missing is a euro RMB market, ie RMB outside China’s jurisdiction used between non-Chinese,” he comments. He makes the comparison of the development of the US dollar as an international currency and explains how the development of the Eurodollar market from 1970 boosted its international role. This enabled non-US to invoice, settle and issue securities denominated in US dollars as well as hold investments in Eurodollar accounts and instruments. “After initial concerns about the possible inflationary effect of the euro USD market, US authorities have adopted a benign approach to this USD market beyond their jurisdiction and control,” Poenisch says.

Whether a euro RMB market will one day be developed remains to be seen. For now, however, there are a number of developments in Hong Kong that bode well for its immediate future. For example, there is the Greater Bay Area initiative, an economic plan that aims to connect Hong Kong with Macau and nine cities in Guangdong province – one of the most affluent regions in China. In June 2020, the authorities announced Wealth Management Connect, another move that would bolster Hong Kong’s standing as a financial centre, as it enables investors to buy wealth management products across the Greater Bay Area.

This, as well as other reasons – such as the city state’s flourishing fintech sector – are reasons to be optimistic for Hong Kong’s recovery after a difficult 2020. And like the Ox, Hong Kong’s standing as an international financial centre continues to be resilient and dependable.

Top 15 offshore RMB economies by weight – November 2020

Top 15 offshore RMB economies by weight - November 2020

Source: Watch. Powered by SWIFT BI

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