Even if it is true that Hong Kong’s importance for China is fading, how much does this matter? — Reuters
THERE is a growing perception that Hong Kong is losing its allure as a gateway to and from China. One of the questions that analysts and economists are pondering is: To what extent can Singapore fill the emerging gaps?
Over the past three years, several reports point to international companies being forced to reconsider their future in Hong Kong.
The Bank of America, J.P. Morgan, French liquor giant Pernod Ricard and hotel group Mandarin Oriental are among several that have either signalled they are reviewing their positions in the territory or have moved staff out, or both.
Many banks and fund managers, in particular, have relocated some of their operations to Singapore.
These moves come in the wake of an economic slowdown in China as well as a security law imposed in Hong Kong in 2020, which tightened restrictions on civil liberties and led to an exodus of talent and capital.
Figures from Statista indicate that foreign direct investment into Hong Kong declined by around 17% in 2022 over the previous year to US$117.7bil. By contrast, direct investment flows into Singapore in 2022 rose by 10% to US$195bil.
Even if it is true that Hong Kong’s importance for China is fading, how much does this matter?
Nobody disputes the major benefits that Hong Kong delivered to the mainland during the first two decades after China opened its economy in the late 1970s.
But as the mainland’s economy grew, some respected China watchers have suggested that Hong Kong became less relevant.
For example, economist Eswar Prasad of Cornell University – who had earlier worked in the China division at the International Monetary Fund – argued in a New York Times column in 2019 that Hong Kong’s importance to mainland China has eroded because the gap between the sizes of the two economies has widened dramatically.
Whereas in 1997, Hong Kong’s economy was about 20% as big as China’s, by 2018 it was only around 3% as large. Its gross domestic product is now just 2% of the mainland’s.
New economic model
Chinese economist Keyu Jin, who teaches at the London School of Economics, points out in her book, The New China Playbook: Beyond Socialism And Capitalism, that China has, as the book’s title suggests, fashioned a new economic model that eschews the need for the rule of law or market-based finance that Hong Kong offered and which are presumed to be critical for economic growth.
She puts more emphasis on China’s intense domestic competition, innovation ecosystem and government support.
But another academic, global economics and management Professor Yasheng Huang of the Massachusetts Institute of Technology, debunks the notion that Hong Kong has become dispensable.
In his recent book, The Rise And Fall Of The East: How Exams, Autocracy, Stability, And Technology Brought China Success, And Why They Might Lead To Its Decline, he points out that a crucial reason for the success of many of the most prominent Chinese companies was their access to financial and legal systems outside China, particularly Hong Kong.
For example, computer giant Lenovo went public on the Hong Kong stock exchange, raising the funds needed for its investments in China; ByteDance, which owns TikTok, and the facial recognition company SenseTime were registered in Hong Kong; Alibaba’s Chinese operating unit was established as a joint venture with a Hong Kong company; China’s biggest search engine Baidu is a wholly owned foreign company registered in the British Virgin Islands; and eCommerce giant JD.com is registered in the Cayman Islands.
More than 1,300 Chinese companies have been listed in Hong Kong, including at least 175 state-owned enterprises – all of which have benefited from their access to global capital.
Hong Kong has provided more capital for Chinese companies through bond and equity financing than any place else in the world.
By 2018, Hong Kong accounted for around 56% of China’s total overseas direct investments, according to the National Bureau of Statistics of China.
Global linkage
In short, Prof Huang points out that the big contribution of the open-door policy initiated by former Chinese leader Deng Xiaoping in the late 1970s “lay not just in allowing foreign companies to establish factories in China, but, crucially, in linking Chinese entrepreneurs with global venture capital and in allowing some Chinese citizens and businesses to exit”.
Lacking the rule of law and market-based finance, it outsourced those functions to Hong Kong. Thus, the relevance of Hong Kong to China lay not in the relative size of its economy but in its rule of law and globally open, market-based financial institutions.
But with some of those features now compromised – or at least perceived to be so – Prof Huang points out that “new safe harbours have emerged, such as Singapore”.
However, he added that “this time they are hosting economic refugees from China rather than performing the institutional functions that previously powered China’s high-tech entrepreneurship”.
This seems unfair and inaccurate and, at best, a half-truth.
Prof Huang may be referring to the Chinese single-family offices (SFOs) which make up a significant proportion – as much as 45% to 50%– of the approximately 1,500 SFOs in Singapore, according to industry insiders, and have grown rapidly in number over the last two years, and high-net-worth individuals who have bought expensive properties in Singapore.
But only part of the Chinese presence in Singapore relates to wealth management and property market activities. China’s corporate presence in Singapore is also considerable, and growing.
Although Singapore is now ranked ahead of Hong Kong as a global financial centre and trails only New York and London, according to the Global Financial Centres Index, it still lags behind Hong Kong when it comes to raising funding for Chinese companies and as a recipient of investments from the mainland; Hong Kong’s equity and bond markets are bigger and more liquid than Singapore’s, and the territory’s connections with China run deep and have a long history.
So despite its fading allure, Hong Kong as a Special Administrative Region still retains formidable advantages as a gateway to China.
But it will be hard put to match Singapore as a gateway from China, especially to South-East Asia and India. — The Straits Times/ANN
Vikram Khanna is an associate editor and senior columnist for The Straits Times Singapore. The views expressed are the writer’s own
