China’s recent mooting of a national security law in response to more than a year of intense civil unrest in Hong Kong has created heightened concern about the future viability of the former British colony as a leading international financial centre.
China’s Two Sessions legislative meeting unveiled plans for a National Security Law at the end of May, triggering concerns that Beijing will soon override the “One Country Two Systems” arrangement to wield undue influence over Hong Kong.
A Hong Kong-based IPO lawyer who asked to be cited as “Taylor” told China Banking News that the launch of NatSec does in fact mark the end of the “One Countries, Two Systems Arrangement.”
“This is the last nail in the coffin for [One Country Two Systems]” said Taylor.
“The unrest in Hong Kong over the past year is to no one’s benefit, and we definitely need the National Security Law, but the way it has been enacted is not correct.
“The National People’s Congress has used Annex 3 to basically bypass LEGCO to pass a new law in Hong Kong.
“That is completely out of the framework of One Country Two Systems – they are not allowed to pass new laws, they are only allowed to interpret the Basic Law.
“To put it bluntly this is completely out of order. If they can use Annex 3 to pass new laws, they can use annex 3 to pass new laws again.”
Taylor points out however that Hong Kong’s comparative advantage as an international financial centre had already been the process of decline due to the maturation of mainland Chinese institutions and regulatory environments.
“Hong Kong did have its advantages back when I first started practice in the mid-2000’s.
“Most foreign investments were channelled through Hong Kong because of the legal system, but it was already becoming less and less.
“China’s arbitration rules for international trade are becoming much more mature, and foreign investors are becoming more comfortable with it.
“So FDI’s going through Hong Kong as opposed to directly to China have been dropping yearly, and are dropping as we speak.”
Taylor said that the Hong Kong protest movement had served to further accelerate the decline of the city’s standing as a trusted international financial centre.
“It’s really affected Hong Kong in a big way – there’s been a massive capital exodus from Hong Kong to Singapore – billions of Hong Kong dollars that are going to Singapore.
“Even ultra high-net worth people are having difficulties opening accounts. Normally it takes them one day for this, but I have clients who needed a month to open an account with someone like United Overseas Bank – that’s unheard of.
“What companies want is a good and stable environment for their employees, and Hong Kong sadly at the moment cannot provide that.
“My take is that the Hong Kong unrest is not going to stop soon – it’s just going to escalate.”
While Taylor views the National Security Law as being a necessary counter-measure for civil unrest, it will only further compound the negative impact of the protest movement on Hong Kong’s international standing.
“A lot of the big hedge funds and bulge brackets investment banks were already considering moving their HQ’s to Singapore, even before COVID.
“With this new law I can see them doing that much sooner because there is definitely no added advantage here apart form the fact that the corporate tax is low.
“Hong Kong’s advantage was being eroded with or without the new national security legislation coming in, but with this new legislation coming in the demise of Hong Kong will accelerate.
“It will never be the same again. There is every chance that Hong Kong can serve some purpose, but it will never be the Hong Kong that we knew a year ago.”
Despite the fact Singapore has been a major beneficiary of Hong Kong’s faltering status as financial centre, Taylor does not see it as a viable replacement from the Chinese perspective
Taylor instead points to the London Stock Exchange as a likely destination for future mainland Chinese IPO’s, particularly given recent barriers put in place by the Trump administration and US bourses.
“Singapore is out of the question. It’s always been too small in terms of funds raised and in terms of daily trading and liquidity.
“Plus there’s too much government intervention to prevent volatility – so no big companies want to list there.
“Hong Kong has to value-add to China. As it stands we have the stock market, which has been the biggest IPO market in the world for the last five or six years in terms of funds raised.
“China does need the forex, but that’s exactly what can be substituted. All China needs is a platform to get forex for their companies.
“The London Stock Exhange would be ideal – my view is that eventually the LSX will takeover Hong Kong.”
The Economist also recently asked if Hong Kong could remain a global financial centre following the launch of NatSec, pointing out that its Anglosphere rule of law system, world-class independent regulators and free speech protections made it a bastion of trust for international investors.
These “squeaky-clean credentials” essentially give China access to the inner sanctum of the West’s financial systems via Hong Kong. The trust that Hong Kong enjoys from even the US Federal Reserve has also helped to make it the main offshore dollar funding centre in the Asia Pacific.
While Shanghai’s market capitalisation rivals that of Hong Kong’s, global investors are still leery of mainland China’s disclosure standards, capital controls, and the potential for state intervention.
As a consequence the Economist sees NatSec as having a corrosive effect on Hong Kong’s standing as an international financial centre due to the erosion of trust.
“The most likely scenario is that Hong Kong’s institutions face gradual decay and that it drifts away from being a globalised financial centre towards one that is more mainland Chinese,” it said. “China would be left with more control over a less effective capital market, raising the cost of capital for its firms.”
These concerns have already prompted many wealthy investors from mainland China to consider withdrawal from Hong Kong, according to a report from the South China Morning Post.
“In the past, we thought it would be safe to invest our wealth in Hong Kong properties and to deposit it in Hong Kong banks no matter how the domestic market and policies changed for private businesses like ours,” said Liu Anliang, an investor from Guangdong province.
“Now we are starting to have doubts.”