Hong Kong is failing (or is it?)

It’s the world’s third largest financial centre after London and New York, and it’s standing at death’s door. Will its economy survive this?

The past few months have not been boding well for Hong Kong, with the raging US-China trade war and the still on-going political protests against the Chinese government. The Covid-19 pandemic has not done any service to the country either. All these have had major impacts on the economy, which further slipped into recession with real GDP contracting by 8.9% in the first quarter of 2020. It was the steepest fall for a single quarter on record. That was not the end of Hong Kong’s turmoil. For better or for worse, on May 28, the National People’s Congress (NPC) commissioned a national security law targeting terrorism and foreign interference in Hong Kong. By utilising a loophole by adding the law to an annex to the Basic Law of Hong Kong, Beijing is able to bypass the city’s parliament. The flurry of events have made it seem that Hong Kong has been suddenly cut off from the world stage. The enacting of the security law can be seen as a breach of the ‘one country, two systems’ principle, which forms the bedrock of Hong Kong’s political and economic systems.

US seems to be leveraging on Hong Kong as a proxy to further their head-on clash with Beijing

In response to the security law, Donald Trump has promised to revoke Hong Kong’s privileged trade status as ‘it is no longer autonomous from China’. US seems to be leveraging on Hong Kong as a proxy to further their head-on clash with Beijing. At first glance, the removal of Hong Kong’s trade status will reduce its importance as a financial centre. However, with the unreliability of US direction, Trump’s attack on Hong Kong might only be good for PR and in itself limited in impact. According to Hong Kong Financial Secretary Paul Chan, the revocation of Hong Kong’s preferential treatment is minimal. Hong Kong’s products made for export to the US accounted for less than 2% of the city’s overall manufacturing and were less than 0.1% of the city’s overall exports. Furthermore, the World Trade Organization (WTO) continues to recognise Hong Kong as a separate entity from China even as US does not, hence global trade with Hong Kong will still be conducted under WTO rules. More importantly, US policy might just backfire as Hong Kong remains a reliable financial centre to markets in China. Hence, the pressure placed on Hong Kong from the US seems to be overestimated.

There are reasons to remain optimistic about Hong Kong’s future. Hong Kong’s business community sees little to no threat to the economy caused by political interference by China. Both HSBC and Standard Chartered have openly backed Beijing’s Security Law. Even though there were fears of capital flight to similar cities with good economic fundamentals and high international repute like Singapore, there has been no real evidence of Hong Kong investors doing so.

It would be unwise for China to dismantle the ‘one country, two systems’ policy that has allowed Hong Kong to gain her world class status as a financial centre

Despite the odds, I believe Hong Kong’s role remains highly crucial to global finance both economically and politically. Hong Kong will survive through the current crisis. Her economy is tenacious and has been evolving to suit the rapidly changing climate. Hong Kong markets have increasingly become more mainland Chinese, with the share of mainland firms in the stock market rising from 31% to 73%. Such firms include Tencent, one of China’s biggest tech firms and Ping An, one of the top insurance firms in the world. Even as Hong Kong becomes increasingly influenced by Beijing, its economic fundamentals remains firmly Western. The ‘one country, two systems’ policy is what that facilitated the differentiation of Hong Kong’s economy from China. They have independent regulators such as the Hong Kong Monetary Authority (HKMA) and strong checks and balances against firms and securities – features that granted them access into the Western financial sector, one that China will not be able to replicate anytime soon. Hence, it would be unwise for China to dismantle the ‘one country, two systems’ policy that has allowed Hong Kong to gain her world class status as a financial centre.

Perhaps Mainland-Hong Kong relations will perpetually be tense. But there is no denying that China’s and Hong Kong’s economy will be highly intertwined for years to come as Hong Kong remains an important financial gateway for China.