Hong Kong’s Financial Future

Can Hong Kong Maintain its Place on the Global Stage?

By Ming Lee

At 11pm on June 30th 2020, one hour before the 23rd anniversary of the 1997 handover of Hong Kong from Britain to China, the controversial National Security Law was enacted. The new law, which consists of 66 articles, aims to criminalise and prevent any acts of secession, subversion, terrorism and collusion. The law, which has been highly scrutinised by critics and citizens alike, with many calling it the “end of Hong Kong” has reignited protests which seem to be never-ending in the territory.

As a former British colony, Hong Kong, one of the world’s most important financial centres, is now a part of China as a “special administrative region”. Operating under a “One Country, Two Systems” approach, that Hong Kong citizens were told would last for 50 years following the handover, Hong Kong remains the only common jurisdiction in greater China where the law is interpreted from precedents of the court, and with the Basic Law being the territory’s own mini constitution. Under the Basic Law, citizens retained many democratic freedoms and rights from Hong Kong’s colonial past, such as freedom of speech, the right to protest, and the right to vote. These are rights that are unheard of in Mainland China, and rights that the people of Hong Kong are worried will be taken away under the Chinese Communist Party’s Security Law.

According to Article 23 of the Basic Law, Hong Kong was always supposed to enact a Security Law, but due to the controversial nature, this never happened. Now, after over a year of anti-China protests and riots – some violent – Beijing finally enacted the Security Law in an effort to contain the protests. Instead, the law has proven to further unsettle citizens, threatening their democratic rights as well as Hong Kong’s judicial independence. Warranting these worries are a number of provisions of the law. National security offences, for instance, are now punishable by a maximum life sentence, and Beijing will be able to choose how the law is interpreted, overpowering any Hong Kong judicial bodies. Many worry that Beijing will interpret any anti-China speech or protest as terrorism, with many already feeling too scared to speak out, deleting social media posts. As part of the Security Law, social media companies are also required to act on China’s behalf to take down such content. This could constitute the end to Hong Kong’s unique access to social media and communication platforms, an access not afforded to those in Mainland China.

For the past year Hong Kong has inhabited an unsettled state; the new Security Law only serves to exacerbate tensions and concerns. With this backdrop of turmoil, will Hong Kong manage to retain its position on the global stage? Many attribute Hong Kong’s status as the third most important financial centre, after New York and London, to its unique relationship to the Western World. Such connections enabled investors to use Hong Kong as a vehicle to invest in the world’s second largest economy, China, bypassing the perceived untrustworthiness of the mainland, resulting from issues surrounding freedom of speech and a lack of capital mobility.

Hong Kong also has a strong trading relationship with the USA. Under the 1992 Hong Kong Policy Act, Hong Kong is treated as a distinct custom zone for US investors, guaranteeing the convertibility of Hong Kong Dollars with US Dollars. As US investors can rely on the interchangeability of the two currencies, much of the activity in Hong Kong’s financial services is denominated in US Dollars, including 97% of foreign exchange deals. Further, Hong Kong’s Clearing House Automated Transfer System (CHATS), an interbank payment system which can be used for clearing and settling USD transactions in Hong Kong, makes it easier for foreign investors to invest in Hong Kong, and indirectly in China, with 9 out of 10 of Mainland China’s largest banks using CHATS with HSBC.

Yet, the ever-worsening relations between China and the US, coupled with the repercussions of the controversial Security Law could well dampen Hong Kong’s future prospects. Those qualities making Hong Kong an attractive alternative to the Mainland – trusted price formations, accurate accounts and timely disclosures resulting from a trusted legal system – are now under threat. With little to lose (only 1% of US bank assets are held in Hong Kong) the US has decertified Hong Kong as an autonomous region from China and has once again began imposing sanctions. The biggest worry is that tensions may escalate to the extent that Hong Kong dollars are no longer able to be pegged to the US dollar.

So, what will be the long-term effects of the Security Law and other Sino-American tensions on Hong Kong’s future as a global financial capital? With China expanding its financial markets in Shanghai and Shenzhen, is mainland China still too reliant on Hong Kong as a financial connection to the rest of the world to curb changes to the territory? Currently, yes. China still has a long way to go to before becoming a reputable global financial centre. 9 out of 10 of its largest companies including Tencent and PingAn are listed in Hong Kong and China’s JD.com is still raising almost $4bn in its Hong Kong Stock Exchange debut in June. There is still optimism for Hong Kong’s financial future. So far, there appears to be no sign of international depositors pulling out; HSBC and Standard Chartered actually support the Security Law. The global unrest surrounding China’s actions over Hong Kong, however, show that the story is not yet over. As further policy measures are put in place to combat the treatment of Hong Kong and its people, it’s future on the global stage remains uncertain.

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