Why HK financial hub story has a long way to go

June 29, 2017 12:06
The HKEx strategic roadmap envisages Hong Kong developing markets in a wider range of listings including A-share risk-hedging and derivatives, bonds, RMB hedging and commodities. Photo: Reuters

The 20th anniversary of the handover of Hong Kong is a time for the media to look back – and especially to make comparisons between life in 1997 and 2017.

There is a pattern to much of the commentary. On the whole, if things have not changed much, it is usually considered a good thing. For example, the Basic Law has successfully protected our way of life. Where things have changed, it seems to be in a negative way. For example, our society has grown more divided.

But in some cases, major change has undoubtedly been a good thing.

If we look back at the Hong Kong stock market in 1997, we see a much smaller platform. The Hang Seng Index constituents’ market capitalization totaled US$313 billion at the end of 1997. Today, that total market cap is around US$1.7 trillion.

This reflects a major change in the profile of companies listed on the exchange.

In 1997, the main index constituents were HSBC and the big local developers and utilities like PCCW, CLP, Cheung Kong, Sun Hung Kai and so on. Today, major mainland companies dominate – Bank of China, China Mobile, Ping An Insurance, Tencent, etc.

The story here is the massive rise of mainland corporations at home and overseas – and the development of Hong Kong as a capital market to serve them and international investors who want to invest in them.

This story has a long way to go – if Hong Kong Exchanges and Clearing’s strategic vision becomes a reality.

Hong Kong in 2017 is a world leader in particular capital market activities. Essentially, the city has made itself an offshore capital-raising center in which mainland issuers list and international investors invest. By bringing these two groups together, Hong Kong has ranked as the world’s top IPO fund-raiser in five of the last eight years.

However, there is far more potential for Hong Kong to expand into new areas. In particular, the city could start to attract international issuers and mainland investors.

We can see a start in this direction. We have seen the launch of the Shanghai and Shenzhen Stock Connect trading links, which has led to talk of expanding these platforms into IPOs and ETFs. HKEx is openly angling for more big international listings. Other developments include the recent inclusion of A Shares in MSCI’s emerging markets index.

Such a trend could lead to a major increase in the size and scope of local capital markets. It would make Hong Kong a much bigger center for wealth management for mainland and other clients. And that would increase demand for all sorts of new products.

The HKEx strategic roadmap envisages Hong Kong developing markets in a wider range of listings, A-share risk-hedging and derivatives, bonds, RMB hedging and commodities.

There are, of course, some skeptics and critics.

A major uncertainty is the future of mainland China’s capital controls. If Beijing maintains tight controls, Hong Kong’s capital markets will remain restricted. All the signs are that China’s leaders accept that freer flows of capital will be important in bringing about greater productivity, efficiency and economic development.

An opposite fear is that if Beijing frees up capital controls enough, Hong Kong will lose a major advantage and Shanghai or Shenzhen will be better able to compete for many sorts of business. However, we all know how the clustering effects of economic activities give cities like New York and London a head start. This argument lends support to the HKEx idea that we should push ahead and consolidate and expand our competitive advantages.

Perhaps the main concern is about the dangers of expanding our capital markets at the expense of Hong Kong’s reputation for quality and integrity. We need a listings regime that is flexible enough to attract IPOs, but we need market rules and frameworks that give investors confidence. Getting this complex balance right is essential, and many would say that if in doubt we should be cautious.

It is surely worth the effort. The vision is for Hong Kong to serve as the main center for China’s global asset trading and pricing and for the deployment and management of Chinese wealth.

That might sound ambitious. But think back 20 years, and you can see how big positive changes are possible.

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Executive Council member and former legislator; Hong Kong delegate to the National People’s Congress