HK security law: China doubles down on support for city as finance hub as concerns mount over its future

04-Jul-2020 Intellasia | South China Morning Post | 6:02 AM Print This Post

Beijing is expanding existing financial schemes and voicing continued support for Hong Kong’s role as a gateway for international investors into China, amid concerns about the impact of a new national security law on the city.

China’s central bank on Friday celebrated the third anniversary of Bond Connect, a scheme that allows foreign investors to buy bonds in the onshore interbank market through financial institutions in Hong Kong.

The People’s Bank of China (PBOC) vowed to improve the programme, which has helped boost foreign ownership of Chinese bonds. About 9 per cent of China’s government bonds were held by overseas investors at the end of June.

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Last week, China also launched a “wealth management connect” programme, which may allow foreign wealth managers to offer products through Hong Kong to clients in the Greater Bay Area, which includes China’s tech hub of Shenzhen and eight other cities in the Pearl River Delta.

The key economic issues are whether the city will retain its role as a gateway in and out of China, and its status as a global financial hub

Tommy Wu

While details of the programme are still being drafted, it could help cement the city’s role as a gateway to China.

These efforts have been accompanied by strong verbal support from senior Chinese leaders in recent weeks. vice-Premier Liu He, a top economic aide to President Xi Jinping, said last month that China will continue to support Hong Kong as an international financial centre. The People’s Bank of China made similar statements last month as Western nations expressed concern over the security law, which has been criticised as heavy handed and an assault on the city’s freedoms.

A total of 27 countries, including Australia, New Zealand, Britain, Germany and Japan, have issued a joint statement urging China to reconsider its national security law, while the US Congress has passed legislation that would allow Washington to sanction banks for doing business with Chinese officials involved in implementing the legislation.

“The key economic issues are whether the city will retain its role as a gateway in and out of China, and its status as a global financial hub,” Tommy Wu, an economist for Oxford Economics, said a research note on Tuesday.

Wu said Hong Kong could broadly maintain its current role, though perhaps not as prominently as before, partly due to Beijing’s efforts to preserve the city as a financial gateway.

While Hong Kong’s role in overall Chinese trade has declined in recent years, the city’s importance for financing in China, especially its access to global capital, has increased because the government maintains rigid controls over cross-border financial flows.

Pan Gongsheng, head of the State Administration of Foreign Exchange, said last month the Stock Connect scheme linking Hong Kong and two mainland stock exchanges in Shanghai and Shenzhen have played an “important role” in China’s financial opening up.

The Stock Connect scheme, which allows foreign investors to buy stocks on mainland exchanges via Hong Kong intermediaries, now accounted for 60 per cent of foreign purchases of mainland stocks, Pan said.

The Bond and Stock Connect programmes, which use Hong Kong’s financial investment structure, have helped persuade global portfolio investors to put more money into China, in a fashion similar to how long-term industrial investors created vehicles in Hong Kong to invest in mainland factories.

Net purchases of Chinese stocks through the Stock Connect channel have been roughly 1.11 trillion yuan (US$157 billion) since its launch in 2014, with a net increase of 40.3 billion yuan in June alone.

In addition, Hong Kong remains the primary “offshore” market for trading the yuan, settling about 70 per cent of transactions in the Chinese currency outside the mainland.

The city is also an important market for mainland firms to raise capital from international investors. Massive initial public offerings by China’s big state-owned enterprises and state banks in Hong Kong have supported China’s economic reform. The city is also now a top choice for China’s hi-tech firms to raise money as Washington increases scrutiny of Chinese listings on US exchanges.

Without Hong Kong, China’s financial markets would be more isolated from the rest of the world, and the yuan’s “international use” would be much smaller.

Hong Kong is also at the forefront of Beijing’s financial opening efforts.

When China began opening its capital markets in 2002 by introducing the “qualified foreign institutional investors” scheme, financial firms based in Hong Kong were among the first group to respond. Among the 295 QFII licences granted to overseas institutions, at least 74 of them were registered in Hong Kong.

However, Hong Kong’s financial intermediary role could be impacted by new US legislation that would penalise banks that do business with Chinese officials accused by the US of playing major roles in setting up the new national security law.

Chen Zhiwu, director of the Asia Global Institute at the University of Hong Kong, said the financial impact of US sanctions was not yet clear, but could become serious for Chinese banks in the city.

“Their use of the US dollar and the payments via SWIFT [system] could be affected, hurting their international businesses, including trade and investment,” Chen said.

Wu, of Oxford Economics, said that the city’s role “as special gateway in and out of China” risks being eroded if the relationship between Beijing and Washington worsens.

According to The Economist Intelligence Unit, even if Washington’s punitive measures are relatively limited, Beijing’s law has already created “a chilling effect on international business sentiment, which could make it more difficult to attract overseas capital and talent to the region”.


Category: Hong Kong

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