Hong Kong isn’t exactly washed up as a hub for finance. But it is fading as a global financial center, thanks to China’s tighter political embrace.
“Hong Kong’s future is to be a giant U.S. dollar bank for the Chinese economy,” says Andrew Collier, managing director of Hong Kong–based Orient Capital Research. “Western expats have left in droves.”
Beijing’s perceived erosion of the One Country, Two Systems doctrine in Hong Kong played a big role in Taiwan’s recent election, which a China-hawkish party won for a third straight time. It has also knocked Hong Kong off its perch as Asia’s premier banking and investment hub.
Business that isn’t strictly China-oriented has migrated to Singapore, which in 2022 overtook Hong Kong in the Global Financial Centres Index compiled by consultant Z/Yen. Just this past week, private-equity giant Blackstone announced that it will double its Singapore head count.
“Singapore has put a lot of effort into attracting growth areas like wealth management and fintech,” says Z/Yen CEO Mike Wardle. “Hong Kong hasn’t shown the same agility.”
Hong Kong finance has been hit by a triple whammy: In 2020, China imposed a new National Security Law that largely eliminated the city-state’s free speech protections and competitive elections.
Harsh “zero Covid” policies shuttered the territory in 2022-23, even as Singapore and other rivals sprang back to life. Imploding Chinese stock and bond markets have all but dried up underwriting and dealmaking. Hong Kong’s 2023 initial-public-offering volume was the lowest in 20 years, at $5.9 billion.
Financial services employment has fallen by 10% to 15% from a 2018 peak, and Westerners’ presence is down by up to 30%, estimates John Mullally, Hong Kong managing director for recruiter Robert Walters.
The good news for Hong Kong is that its most intractable problem, China’s hard-line political shift, is probably the least important in business terms. “Hong Kong’s relative decline is largely a Covid issue,” Z/Yen’s Wardle assesses. “I wouldn’t be surprised at all if it edges back ahead of Singapore.”
Political signals, like the ongoing show trial of dissident publisher Jimmy Lai for “conspiracy to collude with foreign forces,” do make a comeback more challenging, though. Hong Kong economic officials have been on a charm offensive.
Finance chief Paul Chan toured the U.S. and Europe last autumn, promising that “One Country, Two Systems is alive and well.”
Investors aren’t buying it so far, consultant Collier says. “Rather than address the fundamental legal challenges, Hong Kong’s welcome mat tends to be superficial talking points with no real meat,” he says.
Of course, being China’s giant U.S. dollar bank is also a lucrative niche, particularly if markets there regain their animal spirits. Beijing’s tighter grip on Hong Kong could have a financial upside.
The two jurisdictions keep broadening their “stock connect” trading regime, the next target being enabling block trades. An 18-minutes bullet-train ride links Hong Kong with the onshore financial nexus of Shenzhen.
If China shifts back to a bull market, Hong Kong may scramble to gear up again. About 70% of job openings there now require fluent Mandarin, excluding many of the curious expats of old, says Mullally. Qualified Chinese may find richer pastures, and less cultural adjustment, on the mainland, while those educated in the West often want to stay there.
“There might be a talent shortage if market conditions turn more favorable,” the headhunter concludes.
That’s looking like a big if.
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