From the Magazine
Senior investor: Hong Kong's international financial center status has been enhanced
The Chinese mainland and Hong Kong are becoming safe havens for global funds
  ·  2022-07-01  ·   Source: NO.27 JULY 7, 2022

Liu Yang

The past 25 years have seen Hong Kong's capital market going through profound changes. With 29 years' experience in the sector, 22 of which have been in Hong Kong, Liu Yang, Chairperson of Hong Kong-based asset management firm Atlantis Investment Management, has built her career at the center of this changing landscape. In an exclusive interview with Beijing Review reporter Zhang Shasha, Liu shared her views on the development. Edited excerpts of the conversation follow:

Hong Kong Exchanges and Clearing Limited posts the stock code of Bilibili, a video platform from the Chinese mainland, on March 29, 2021 (XINHUA)

Beijing Review: What events have most impacted Hong Kong's capital market development over the past 25 years? What changes have taken place in terms of its global status during this period?

Liu Yang: Hong Kong is a leading international financial center and the third largest capital market in the world. It is both closely tied with the Chinese mainland and also shares the ups and downs of the global financial situation. During the past 25 years since its return to the motherland, Hong Kong's capital market has withstood three major tests.

In 2003, when the severe acute respiratory syndrome epidemic emerged, there were 852 companies listed on the Hong Kong Main Board, an increase of only 40 compared to the previous year. However, the region's economy showed great resilience, recovering in the third quarter of that year after the outbreak ended. The quick rebound would have been impossible without the support from the mainland. The Mainland and Hong Kong Closer Economic Partnership Arrangement was signed in June 2003, a key measure to liberalize trade boundaries and forge closer economic ties between the two sides. That same year, the Central Government adopted the Individual Visit Scheme allowing travelers from the mainland to visit Hong Kong and Macao without the need of being part of organized tours, which greatly boosted consumption in the region.

When the 2008 financial crisis swept across the world, it delivered the worst year for Hong Kong's financial market since 1974. In 2009, the Central Government rolled out 14 vigorous measures in seven areas, including financial and economic cooperation, to help Hong Kong through the difficulties. The mainland and Hong Kong signed a 200-billion-yuan ($29.9-billion) currency swap agreement and, by May of that year, renminbi deposited in Hong Kong surpassed 50 billion yuan ($7.48 billion), laying a solid foundation for it to become the offshore renminbi business center.

The year 2021 was Hong Kong's darkest since its return to the motherland. Before talking about the Hong Kong stock market in 2021, it is necessary to mention what happened in 2015 and 2018. The market turned bearish due to capital outflow from Hong Kong following the renminbi exchange rate formation mechanism reform in 2015 and it declined sharply after the beginning of China-U.S. trade frictions in mid-2018. However, despite this adversity, the stock market registered a bullish wave in 2018. New economy stocks flocked to debut in Hong Kong and because of the introduction of new rules under which listing applicants could adopt the Dual-Class Share Structure, also known as shares with weighted voting rights, the Hong Kong Stock Exchange (HKEX) raised HK$277.85 billion ($35.4 billion) through initial public offerings (IPOs), the most since 2010, and Hong Kong again became the world's premier IPO market. The poor performance of Hong Kong's stock market last year was mainly due to investment withdrawal triggered by the turmoil in the region in 2019, the COVID-19 pandemic and escalating China-U.S. frictions.

But generally, Hong Kong's status as an international financial center has been enhanced over the past 25 years, with a robust financial system, effective macroeconomic policies and an effective framework of supervision. In the future, relying on resources and support from the mainland, the region's capital market will become increasingly influential internationally.

What are the opportunities and uncertainties facing Hong Kong in the future?

Among countless variables in this era of great changes, the following four have the most direct impact on Hong Kong:

Downward pressure from the global economy. The world is encountering a new round of recession with stubbornly high inflation. The latest inflation rates in the U.S., Britain and many EU members have hit a 40-year high. As an international metropolis and a global trade and shipping center, Hong Kong is sensitive to global economic changes. To cast off the shadow of 2021 as quickly as possible, it can learn from Singapore's successful port-based economic transformation and make every effort to integrate into the development of the Guangdong-Hong Kong-Macao Greater Bay Area (GBA).

Russia-Ukraine military conflict. The conflict has lasted more than four months and is likely to further escalate. It is difficult to predict the impacts of global instability such as this on Hong Kong in the future.

The COVID-19 pandemic. Hong Kong has paid high social and economic costs due to the pandemic. Despite a recovery from flare-ups in April, it is possible for new infections to emerge in the region. Moreover, adjustments to response measures on the mainland can directly affect the region's development. Travel restrictions will not be fully lifted if virus spread is not under control.

The world currently is up against the largest liquidity drain on record. Hong Kong, as a main battlefield of the trade war, financial war and currency war between China and the U.S., is susceptible to greater impacts.

Currently, it is a time of great changes unseen in a century, with a momentum toward deglobalization. The Chinese mainland and Hong Kong, especially the Hong Kong stock market, are becoming important safe havens for global funds. The launch of the Cross-Boundary Wealth Management Connect Scheme in 2021, which allows eligible residents in the GBA to invest in products distributed by banks in each other's market, consolidated the interconnectivity between mainland and Hong Kong markets. Hong Kong will also serve as a bridge for Chinese intelligent manufacturers to go overseas and for foreign-listed Chinese firms, known as China Concept Stocks (CCTs), to return.

What are your suggestions for Hong Kong to strengthen its international competitiveness?

To consolidate its role as an international financial center, Hong Kong should rebuild and shore up investor confidence, address market concerns and create a sound investment atmosphere. The government needs to launch preferential policies to attract privately held companies that handle investment and wealth management for wealthy families to operate in the region.

As Russia's international trade and financing environment is in turmoil, it is necessary to highlight the hedging function of the yuan and promote the use of the digital renminbi. More application scenarios of the digital currency should be created, including trade settlement and trade financing.

Decision-making authorities of the mainland and Hong Kong should jointly make Hong Kong's capital market the main platform for facilitating the CCTs' return for listing. The infrastructure of HKEX, together with accounting, taxation, auditing, supervision and other rules, are in line with capital markets of other countries, indicating that the cost and technical obstacles involved in the cases should be minimal.

It is also important to establish renminbi-denominated asset trading and settlement systems, smooth the circulation of renminbi deposits, and make Hong Kong the main global offshore renminbi business center. Renminbi deposits in Hong Kong have exceeded 1 trillion yuan ($149 billion), bringing about an urgent demand for safe and effective investment channels and products.

On the basis of the Northbound Scheme, through which overseas investors can purchase the Chinese mainland's A-share stocks, authorities should formulate policies that are more conducive to financial integration and encourage investment from the mainland to make up for the liquidity gap in Hong Kong caused by the outflow of international capital. Given the current lack of liquidity in the market, it is feasible to lower the threshold for mainlanders to invest in Hong Kong and increase access to stock market bridging initiatives such as the Shanghai-Hong Kong and the Shenzhen-Hong Kong stock connect schemes.

The HKEX should make more efforts to attract IPOs of mainland-based innovative hi-tech enterprises and become an incubator for emerging unicorn firms—startups valued at more than $1 billion. This will add to Hong Kong's appeal to international investors and help cultivate more young finance professionals. 

(Print Edition Title: Bullish on Prospects)

Copyedited by G.P. Wilson

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