Despite recent downgrades of Hong Kong’s outlook from “stable” to “negative,” Hong Kong’s institutions will continue to support the status of a leading international financial center and will play a critical role as a strategic partner in opening up China’s economy to the global market – as sectors engaged in finance, trade and investment are well-positioned to be an important link in the chain of global economic development
By Queenie Tsui
Earlier in March, Hong Kong’s outlook was downgraded from “stable” to “negative” by two prominent international credit rating agencies, suggesting that Hong Kong would see “muted” economic growth in the short run largely due to its close political, economic and financial ties with China whose economy is plagued with slowing growth, overcapacity and a number of imbalances.
In response to one of the credit outlook downgrades that caused a big angst in the local business community, Hong Kong’s Financial Secretary John Tsang subsequently rebutted the claims that Hong Kong is on a slippery slope and called them “speculative and subjective statements.” He highlighted Hong Kong’s close ties with China are, on the contrary, an “opportunity” for the city to benefit from the economic transformation of Mainland China.
While the downgraded outlook of Hong Kong’s credit ratings signifies a growing risk which should not to be taken lightly, it is equally important to note that Hong Kong’s current rating remains in the top tier, “supported by significant fiscal buffers, as evidenced in low government debt, sizeable fiscal reserves, and large foreign exchange reserves which lend credibility and stability to the linked exchange rate regime.”
The strength of Hong Kong’s institutions continues to support the city and its status as a leading international financial center, and will play a very critical role as a strategic partner in opening up China’s economy and facilitating its integration to the global market – as reflected in China’s 13th Five-Year Plan announced by the National People’s Congress in Beijing. The sector engaged in global trade and investment, meanwhile, remains key to the overall economy of Hong Kong.
A strategic hub
With the launch of the Asian Infrastructure Investment Bank (AIIB) and “One Belt One Road” (OBOR) initiatives, Hong Kong is well positioned to be a key player in the economic development beyond the region. The fact that Hong Kong has been “chosen” to be a strategic financial hub and to take part in the growing economy of China is evident in a series of development policy – some initiatives, including efforts to liberalize the Chinese currency, date back to the early 2000s.
The Qualified Foreign Institutional Investor (QFII) program – which makes Hong Kong as China’s premier offshore renminbi (RMB) business center and allows global institutional investors to invest in RMB-denominated capital markets – is a fine example. In operation for over a decade, QFIIs has expanded from US$20.7 billion in 2011 to nearly US$80.8 billion in 2016.
By the same token, the number of licensed foreign institutions has also increased from 103 to 279 during the same period. Moreover, China’s State Administration of Foreign Exchange (SAFE) in February further loosened control over foreign investment by abolishing the requirement for QFIIs and allowing licensed institutions to obtain approval of investment quotas with simplified rules.
The Renminbi Qualified Foreign Institutional Investor (RQFII) scheme, launched in late 2011, has further expanded Hong Kong’s role as an offshore RMB center: overseas investors can invest in mainland capital markets through renminbi-denominated funds established in Hong Kong by Chinese financial firms. Its success paved the way for Chinese regulators to widen the scope to include international banks and asset managers with a presence in Hong Kong for participation in the scheme.
The Shanghai-Hong Kong Stock Connect is the first-ever securities trading and clearing connection between the Mainland and Hong Kong. Since 2014, this ground-breaking initiative has provided an unprecedented channel of mutual market access for international investors looking to tap into the Chinese capital market, and vice versa.
Per China’s 13th Five-Year Plan, a core objective is to further open up the Chinese economy and to establish a mutually beneficial relationship between China and the world. It is crucial that Hong Kong can be leveraged for its financial expertise and professionalism, for its experience in the Mainland’s financial community and for its proximity to a market undergoing an extraordinary process of financial reform.
All eyes on Southeast Asia
But there is more: notwithstanding the increasing significance of China to Hong Kong’s long-term success as a global financial center, regional partnerships with countries in the Asia Pacific region are becoming increasingly important as a way to strengthen Hong Kong’s competitiveness and to further accelerate economic growth in a sustainable and comprehensive manner.
The Asia Regional Funds Passport (ARFP) – a multilateral framework led by Australia, New Zealand, South Korea and Singapore and similar to the UCITS system of the European Union – will “facilitate the cross-border marketing of a managed funds across participating economies in the Asia region” and provide participating states with economic benefits.
These include opportunities for better management of portfolios among investors and meeting their objectives, an increased level of attractiveness of the region in project financing, enhanced liquidity in the financial markets collectively, and strengthened competitiveness of the region’s financial markets and fund management industry on the international stage.
Although not yet a signatory of the ARFP, Hong Kong stands on a somewhat privileged ground following the launch of the Mutual Recognition of Funds (MRF) with Mainland China, which is an exclusive access allowing Hong Kong fund managers to offer retail funds domiciled in Hong Kong to Mainland investors, and vice versa.
Since the statement of intent signed in 2013, more economies including the Philippines, Thailand and Japan have become members of the passport group after signing a statement of understanding in September 2015. Hong Kong, hence, should not be left out of the pact poised to create a large industry-specific alliance amid discussions on whether Hong Kong would benefit from AFRP.
There are, however, challenges with the ARFP from Hong Kong’s perspectives. For one, Hong Kong remains an attractive destination for global fund managers because of the MRF and access to Mainland’s retail fund market, even as a non-member of the Passport group. More importantly, many have questioned the fund regime which promises to harmonize regulations and streamline procedures over its effectiveness in reality.
The reported failure of the mutual recognition of cross-border offerings of collective investment scheme between Australia and Hong Kong in July 2008 may explain the cause for such concern. The lack of a common currency and vastly different tax policies points of consideration that may dissuade Hong Kong from participating in the regime.
However, Hong Kong should not be discouraged from joining ARFP which could potentially create 170,000 jobs in the region and save Asian investors US$20 billion per annum in fund management costs. Hong Kong’s membership will be critical for the development of a large-scale market for collective investment schemes in the region as well as the promotion of sustainable economic development by facilitating the region’s savings toward productive investment.
Whether Hong Kong will participate in the pan-Asian funds scheme, active engagement with neighboring markets is certainly a key step for maximum access to financial markets in the region. It is an encouraging sign that Hong Kong is looking into becoming a regional asset and wealth management hub as well as promoting growth and development, particularly in an era of global economic uncertainties.
And proactive engagement does not limit to financial services only but should also be extended to all industries. AmCham Chairman Walter Dias, in recent interviews with HKTDC and RTHK, reiterated that Hong Kong is an extraordinary regional and global hub of business and, more importantly, that the city can leverage its enormous expertise and experience in pillar industries to capture opportunities in trade and investment.
In a world of increasing globalization, regional partnerships, trade agreements and multilateral initiatives including AIIB and OBOR will be the future of economic development – propositions that Hong Kong cannot afford to miss. Likewise, Hong Kong ought to consider joining the Trans-Pacific Partnership (TPP) as a non-sovereign party or as an observer in what is dubbed a sophisticated global trade agreement of the 21st century covering 40 percent of global GDP.
In fact, emerging markets and opportunities in trade and investment continue to be a focus of MNCs and SMEs alike in the business community of Hong Kong – a focus AmCham has particularly emphasized through advocacy works as well as a series of public events and seminars highlighting the development of emerging markets in Southeast Asia.
The Chamber, so far, has hosted US Ambassador to the Republic of the Union of Burma Derek Mitchell, Vietnam Consul General in Hong Kong Hoang Chi Trung, and, more recently, Minister and Special Advisor to the Prime Minister of Ethiopia Arkebe Oqubay since the beginning of the year. Hong Kong’s participation in global trade can certainly be a legacy in a liberal environment of best practices.
Lastly, it is very interesting to point out the trend that companies, especially those in the trading and manufacturing sectors, are already expanding their investment footprints to the sub-Saharan region of Africa as governments in African countries have developed plans to strengthen their local industries of various types of manufacturing and to transform their economies into a green, sustainable hub of international commerce.