China envisions Hong Kong’s capital markets as a beacon of prosperity, having lifted the city out of social chaos in June 2020. This week, Beijing backed that goal with vocal support at an investment summit attended by CEOs of global banks and money managers.
The question has never been more pertinent as the US ushers in president-elect Donald Trump in January. His economic policies will roil global markets, based on campaign speeches. Hong Kong, caught in the crosshairs of the US-China spat in his first term, should be preparing for a repeat, according to popular predictions.
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At play is HK$32 trillion (US$4.1 trillion) of assets managed by local and global funds, as well as private banks in the city, according to government data. The stake is surely far higher, with trillions of dollars sloshing in Asia-Pacific, eyeing the potential rewards in the capital markets on both sides of the city’s border.
The world’s biggest lenders including JPMorgan Chase, Bank of America, Citigroup, HSBC and Mitsubishi UFJ Financial Group, are counting on China for growth, with thousands of employees based in the region. Bridgewater Associates and BlackRock are also banking on a turnaround in one of the cheapest stock markets worldwide.
“People are leery of investing a lot of money in a country that is part of geopolitical tensions,” said co-chairman Howard Marks, whose Los Angeles-based firm manages US$205 billion of assets. “China is still trailing other markets. It’s still an unpopular market. [But] the best values are usually found in unpopular markets.”
Beijing has urged Hong Kong to be “self-assertive” in deepening financial reforms, dovetailing with national developments, Vice-Premier He Lifeng said. The central government will also help more mainland companies list in Hong Kong, improve mutual market access and strengthen its position as a global offshore yuan hub, he added.
The authorities will soon allow foreign investors to trade commodities and other financial options through the “Connect” schemes with Hong Kong, Wu Qing, chairman of the China Securities Regulatory Commission (CSRC), stated. It will help more mainland firms list in Hong Kong and strengthen the city’s position as a global offshore yuan hub, he added.
“We want to improve the stability, transparency and predictability in our policies,” Wu said.
That could go a long way towards reassuring global investors, according to CEOs and executives at the Global Financial Leaders’ Investment Summit, hosted by the Hong Kong Monetary Authority. The industry’s flagship event, attended by a full house of 300-odd executives, concluded on Wednesday.
Wu Qing, chairman of the China Securities Regulatory Commission, speaks at the Global Financial Leaders’ Investment Summit on November 19. Photo: Dickson Lee alt=Wu Qing, chairman of the China Securities Regulatory Commission, speaks at the Global Financial Leaders’ Investment Summit on November 19. Photo: Dickson Lee>
“We had a really strong ministerial delegation from China, which is a very strong testament to the importance of Hong Kong globally, and the importance of Hong Kong to mainland China,” Standard Chartered CEO Bill Winters said. “It’s a real pleasure.”
Many global banks and funds will be hoping for Hong Kong to withstand a repeat of Trump’s tantrums from his first term, and prove its sceptics wrong. The president issued an order ending the city’s preferential economic treatment in July 2020 and signed the Hong Kong Autonomy Act, which imposes sanctions on individuals and entities that contribute to the erosion in Hong Kong’s autonomy.
All told, Trump’s trade war resulted in tariffs on US$550 billion worth of Chinese exports and US$185 billion worth of US goods.
“Chinese leaders delivered a strong message of support for Hong Kong at this very tricky time to cope with the challenges ahead,” Tom Chan Pak-lam, honorary president of the Institute of Securities Dealers. “We can expect more measures to help Hong Kong overcome the next round of trade and political fight.”
“A strong ministerial delegation from Beijing is a strong testament to the importance of Hong Kong,” says Winters of Standard Chartered. Photo: Edmond So alt=”A strong ministerial delegation from Beijing is a strong testament to the importance of Hong Kong,” says Winters of Standard Chartered. Photo: Edmond So>
Being in the crossfire of that “seemingly intractable” China-US conflict was one of the three reasons why “it’s over” for Hong Kong, former Morgan Stanley investment banker Stephen Roach said in February. The data suggests the assessment is far from true, as the city continues to burnish its role as a “superconnector” to China’s capital markets.
Since the Stock Connect took off 10 years ago, foreign investors have bought 1.8 trillion yuan (US$249.2 billion) worth of Chinese stocks on a net basis, exchange data showed. Mainland-based funds loaded up HK$3.4 trillion (US$437.2 billion) of those listed in Hong Kong. Foreign ownership of Chinese stocks has risen 20 fold in that period.
“I am expecting to see a lot of a lot of vibrancy here and from many different parts of Asia in coming years,” Citigroup CEO Jane Fraser said. “We are seeing, particularly, the connectivity with Hong Kong as a critical global financial hub.”
Trump’s threats aside, “trade flow will change, but it will not stop,” she said in an interview. “There will be counters to the dampening effect of the tariffs.” Even with extra tariffs, China is just too important a market to be ignored, she added.
“I am expecting to see a lot of a lot of vibrancy here and from many different parts of Asia in coming years,” Citigroup’s Fraser says. Photo: Dickson Lee alt=”I am expecting to see a lot of a lot of vibrancy here and from many different parts of Asia in coming years,” Citigroup’s Fraser says. Photo: Dickson Lee>
BlackRock, the world’s biggest money manager, invested some 8 per cent of its clients’ US$10 trillion assets in the region, according to its 2023 annual report. Hedge fund titan Bridgewater Associates has US$7 billion locked up in Chinese assets, according to co-CIO Bob Prince.
DBS Group, Southeast Asia’s biggest bank, has spent HK$1.4 billion snapping up several floors of prime office space in Central since September.
Moreover, top executives from Bridgewater to DBS Group and HSBC are betting their own money to put down roots in the city. Prince, DBS Bank (Hong Kong) CEO Sebastian Paredes and HSBC Asset Management CEO Nicholas Moreau have ploughed almost HK$200 million into luxury homes on the cheap this year.
“There have been very few bargains and very little value in Hong Kong’s residential market for a long time,” said Chris Gradel, co-founder and CEO of private equity firm PAG. Gradel himself paid HK$550 million in May last year for the 100-year old waterfront home called Villa Ellenbud in Pok Fu Lam.
The entrance to Gradel’s Villa Ellenbud on 50-52 Sassoon Road, Pok Fu Lam. Photo: Google Map alt=The entrance to Gradel’s Villa Ellenbud on 50-52 Sassoon Road, Pok Fu Lam. Photo: Google Map>
Despite the good vibes at this week’s summit, Hong Kong is walking a tightrope. The Hang Seng Index, a benchmark comprising many of China’s biggest enterprises and Trump’s possible targets, has lost all of its post-stimulus bump. This year, more investors are concerned about the city’s political future, a survey by the Private Wealth Management Association and KPMG China showed.
While exchange officials are cheering a revival in initial public offering proceeds this year at US$9.2 billion, it is a far cry from its bumper year in 2020 (US$50 billion) and 2021 (US$42 billion). Beijing will need to do much more, according to Oaktree Capital Management.
“The steps being taken so far are promising, but in many cases they have been described as just a start,” Oaktree’s Marks said.
While China’s stimulus blitz suggested it would not allow its markets to crash, policymakers in Beijing “have a lot more to deliver,” said Karen Karniol-Tambour, the co-CIO at Bridgewater. Ideological differences may be a hindrance, she added in an October 10 podcast.
“They suddenly have a lot of ideological opposition to many different types of stimulus they might need, whether it is all the moral hazard issues that come with handling as tough as a deleveraging as they do, or issues of stimulation where they really feel the kind of stimulation the US did, like giving everyone a check, is ideologically not OK.”
China’s reliance on Hong Kong as a recycler of onshore capital and an offshore fundraising hub has increased, given the shortcomings at home, where consumer confidence has dropped to its lowest level in decades, according to BlackRock. Companies rely on bank loans for almost two-thirds of their financing, and nearly one-third of household savings is socked away in cash for rainy days.
“In my opinion, this is the most important lesson in recent economic history: countries aiming for prosperity don’t just need strong banking systems – they also need strong capital markets,” Chairman and CEO Laurence Fink said in his annual letter to investors. “That lesson is now spreading around the world.”
Despite the misgivings, the Trump years have been rewarding for investors. The MSCI China Index, which tracks 700-odd Chinese stocks traded at home and abroad, returned 98 per cent in US dollar terms during his first presidency. The Hang Seng Index gained 31 per cent, while the CSI 300 gauge surged 74 per cent.
Xavier Musca, CEO of Credit Agricole CIB, said the French lender will not pull back from China markets if there is another trade war. As the second most important economy, China will continue to grow and open to outside investors, he added.
UK lenders HSBC and Standard Chartered are realigning their resources to focus more on affluent individual customers and the wealth-management business. Deutsche Bank, Germany’s market leader, stands to gain from the increasing number of wealthy clients in the city, Asia-Pacific CEO Alexander von Muhlen said.
“The most important underlying demographic supporting our view of the opportunity is that people are becoming wealthier – wealthier in Asia, and wealthier in China,” Winters said. Deutsche Bank is getting strong fund inflows and performance from its clients, von Muhlen added.
HKMA chief executive Eddie Yue Wai-man said Hong Kong is steadfast in its “superconnector” role as the premier gateway for investors looking to enter the mainland Chinese market and vice versa, adding that enhancements to the Connect schemes are in the pipeline.
“Clearly, there’s an enhanced intention of expanding the bond [and] equity connects, and very strong intention from the Chinese regulators to support Hong Kong,” said Sebastian Paredes, CEO of DBS Group’s banking unit in the city. “All that, combined with the very strong stimulus packages that we have seen of late to energise the economy, made us feel very positive about next year.”
