HK is a Key Beneficiary of Mainland China’s High Savings Rate
Hong Kong is a key beneficiary of mainland China’s high savings rate. Indeed, a spillover of capital into Hong Kong from the mainland’s overflowing reservoir of household savings could provide much needed relief for Hong Kong, which is struggling with protracted economic and geo-political uncertainties.
While the Chinese mainland is subjected to capital controls, Hong Kong is treated as a special case, with Beijing gradually easing restrictions to allow money to flow under various schemes.
At the Global Financial Leaders Summit held in Hong Kong in November 2024, Chinese Vice Premier He Lifeng, who is the nation’s top economic official, said: “To accelerate the development of our country into a financial powerhouse requires Hong Kong to become an even stronger international financial centre.”
The reality is that for some years, Hong Kong’s stock market has been held back by insufficient investment demand. This can be seen as follows:
*Most initial public offerings (IPOs) in Hong Kong don’t perform. In the past five years, 473 companies became listed, and 81% of these still trade below their IPO price.
*Trading volume is lacklustre. So far this year, the market’s average daily turnover is HK$128 billion, which is below levels as far back as three to four years ago. (For comparison, the combined daily turnover of the mainland’s Shanghai and Shenzhen exchanges is about five to six times larger than Hong Kong, making them the world’s second largest stock market after the U.S.)
*Hong Kong share prices have been weak, with the Hang Seng Index declining 16% over the past 10 years (during the same period, the S and P 500 index in New York increased 187%).
*Shares of Chinese companies that are dual listed domestically and in Hong Kong (with the same voting and dividend rights) trade at very different prices, reflecting the weakness in Hong Kong. Currently, the domestically listed “A” shares trade at a 48% higher price than the Hong Kong-listed “H” shares, on average, with the gap wider than usual by historical standards.
Clearly, Hong Kong’s stock market is not in good shape. Interest has been dampened by various factors, including China’s economic slowdown (about 80% of Hong Kong’s market capitalization is based on listing mainland companies), Covid, geo-political and social tensions and the gravitational pull of the bull market in New York. In Hong Kong, the financial services industry has responded with persistent staff cuts and other measures to reduce costs, with negative multiplier effects on the whole economy.
What could change the game is mainland China’s emergence as a major exporter of capital, with Hong Kong as the key offshore service center for such outflows.
Savings have piled up on the mainland because investors have lost confidence in real estate, which used to take up half to two thirds of people’s savings. In a historic shift, the biggest allocation now is for bank deposits, which represent 46% of all savings. Only 18% and 11% of savings, respectively, go to property and investments in stocks and funds, according to official figures.
China’s savers currently have a mind-boggling Rmb 137 trillion (HK$147 trillion) stored in bank deposits, a record amount that exceeds their own household spending and an amount equivalent to more than 110% of the national gross domestic product. For them, the problem is low yields (about 1.5% to 2% per annum) on their deposits. They are motivated to diversify to more attractive investments, giving China’s domestic stockmarkets as well as Hong Kong a golden opportunity to capture business.
To encourage investors, Chinese regulators are taking strong measures to improve the quality of Chinese listed companies. A so-called “Nine Measures Plan” was announced by the government in April, 2024 to encourage higher dividends and more share buybacks by Chinese companies.
The equity risk premium (“ERP”) for companies listed on the mainland and in Hong Kong have become very attractive, at around 6% to 7%. This means investors are being paid an additional 6% to 7% return above the risk-free government bond interest rate to purchase stocks.
In Hong Kong, the stock exchange and officials from the government, regulatory and monetary agencies have fought long and hard to open up cross-border avenues to let the money come. The Stock Connect Scheme, which already contributes 17% of Hong Kong’s stock turnover (and 7% of the mainland’s) has widened to include bond and Exchange Traded Fund (ETF) trading channels, with the next step possibly taking in ETFs in fixed-income and commodities (including gold). An IPO Connect that links the primary markets of Hong Kong and the mainland would be a crowning achievement, if Beijing officials are willing to permit it, as this would allow mainland investors to participate in IPOs in Hong Kong.
Mutual Recognition of Funds (MRF), allowing retail distribution of funds, is another major step. On Hong Kong’s wish list is for mainland insurance companies to be added to the list of eligible investors in MRF-approved funds. Specially tailored for the Greater Bay Area (GBA) is the new Wealth Management Connect scheme, which lets GBA residents directly invest in funds across borders. Hong Kong is also pushing into the family offices sector, and may even overtake Switzerland to become the world’s No. 1 in the sector by the end of the decade.
As the biggest global center for trading offshore Rmb, Hong Kong also has products denominated in the Chinese currency, widening its product menu and improving its ability to participate in Rmb internationalization.
No one thought that China’s property bust would have the unintended consequence of freeing up capital that could feed Hong Kong’s market. But for today’s Hong Kong, no alternative source of money with comparable potential is available.
Outside China, the world’s asset management industry is dominated by Western fund managers, whose view on Chinese equities is generally negative, resulting in outflows. As for stories of Middle Eastern wealth, so far it’s been a lot of sizzle, little steak. Southeast Asian money is promising but Hong Kong must compete with Singapore to get a share.
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