World Economy

Change Coming to China’s Wall Street

Change Coming to China’s Wall StreetChange Coming to China’s Wall Street

In Hong Kong, a city that lives for business, 2016 is shaping up as a year to forget.

In the first quarter, the city’s gross domestic product shrank by the most since 2011. In February, property sales hit a 25-year low. That same month, HSBC voted to stay in London instead of relocating its headquarters to the former British colony. In March, Hong Kong fell behind Singapore in Z/Yen Group’s semiannual ranking of financial centers.

Then in April, Dalian Wanda Commercial Properties, one of the world’s biggest real estate developers, told the 125-year-old Hong Kong stock exchange to suspend trading in its shares. The company plans to relist elsewhere, according to a document sent to prospective backers—and that somewhere else poses an existential crisis for capitalism’s Asian citadel, Bloomberg reported.

Wanda’s action was especially significant because of the identity of its controlling shareholder. Wang Jianlin, 61, Asia’s second-richest person, is worth $33 billion, according to the Bloomberg Billionaires Index.

 The move by the ex-People’s Liberation Army officer—perhaps best known internationally as the owner of AMC Entertainment and a part-owner of soccer club Atletico Madrid—is a shot across the bow of the bankers, traders, and tycoons who turned Hong Kong into one of the world’s great financial centers. Wang’s decision was the first step toward delisting the $29 billion company on Hong Kong Exchanges & Clearing and listing on an exchange on the mainland—most likely on Shanghai’s, the largest. “The news took everyone by surprise,” says Raymond Cheng, Hong Kong-based analyst at CIMB Securities.

It was inevitable that, as the supercharged Chinese economy cooled, Hong Kong—long China’s Wall Street—would take a hit. But Hong Kongers are confronting a deeper shift in understanding their place in China, in Asia, and in the world. The very slowdown on the mainland that’s put the brakes on Hong Kong has at the same time spurred an acceleration in Beijing’s efforts to lure foreign investment by opening up its financial system.

Because of these big-picture changes, the Hong Kong and Shanghai exchanges are, however gradually, trading places. Keen to establish the mainland city as an international center of finance, China’s government has made it easier than ever to invest directly in mainland markets without going through Hong Kong.

That’s one reason why MSCI, whose indexes are used as benchmarks for tracking more than $10 trillion of investor assets, is moving closer to adding mainland shares to its emerging-markets gauges. It’s a decision that is inescapable.

A nod from MSCI, which could come as soon as Tuesday, would spark an estimated $16 billion of inflows into China and signify the most high-profile endorsement yet of the country’s transition to a more market-based economy.

“The distinction between Hong Kong and the mainland stock market will eventually cease to exist,” says Niklas Hageback, a Hong Kong-based money manager who helps oversee about $175 million at Valkyria Kapital, which focuses on stocks in the Asia-Pacific region.