World Economy

Is HK, China’s Gateway to Global Markets, in Danger?

Is HK, China’s Gateway to Global Markets, in Danger?Is HK, China’s Gateway to Global Markets, in Danger?

Hong Kong has long been one of the world’s most important financial centers. But this status could change if China reacts too severely to pro-democracy protests currently disrupting the city.

Hong Kong is right there at the top, economically speaking – worldwide, in fact, if one is to believe the regular conclusion reached by the “Index of Economic Freedom” published by the US think tank Heritage Foundation and the Wall Street Journal.

It is true that Hong Kong’s economic clout has lessened since it was returned to Beijing, and also as a result of the economic boom in the People’s Republic: in 1997, the year of the handover, Hong Kong was still contributing 16 percent of the entire Chinese gross domestic product, whereas today it provides a meager 3 percent.

The Hong Kong Stock Exchange (HKEx) is the sixth largest stock exchange in the world and the second largest in Asia. The “special administrative region” is also the second-largest private equity center in Asia. More than 70 of the world’s 100 biggest banks operate in Hong Kong, and some two-thirds of all direct foreign investments in China pass through this nerve center.

 Trading Center

Even years after mainland stock exchanges were set up in Shanghai and Shenzhen – in which the Hong Kong exchange takes part – Hong Kong is the most important international trading center for shares in Chinese companies. In December 2013, altogether 1643 companies were listed at the Hong Kong exchange, 797 of them from mainland China. They account for some 60 percent of the market capitalization of all listed companies on the HKEx.

Hong Kong is the largest and most important trading center for the mainland’s currency. Some 90 percent of the foreign trade carried out in renminbi was transacted in Hong Kong.

 Shanghai, Singapore Seeking Opening

However, although Hong Kong is very important for China’s access to international finance and exchange markets, it no longer has the same exclusive, irreplaceable key position that it had even just ten years ago, Sebastian Heilmann, who heads the Berlin-based China think tank MERICS (Mercator Institute for China Studies) says.

“If Hong Kong were to be damaged as a financial center amid the current political unrest, it would considerably accelerate Shanghai’s rise to become the most important international financial hub in China - not just because the Chinese government will try to bring this about, but also because Chinese and international demand will move in the direction of Shanghai.”

Big international banks in Hong Kong already have plans in store to shift part of their business to Singapore.

But Heilmann is skeptical about their value: “Singapore is already an important offshore financial center for Chinese companies and investors. But Singapore would not have the volume and market distance to be able to take over Hong Kong’s business. If Hong Kong were to suffer a political setback, Singapore would profit from it. But the main beneficiary would be Shanghai.”

He says he is convinced that any weakening of Hong Kong as a financial center would cause a very rapid expansion of Shanghai into a fully fledged Chinese international financial hub.