Hong Kong faces a series of serious challenges to its role as a leading Asian financial center, according to a new report, including threats to the status of the Hong Kong dollar, an erosion of its prized rule of law, and a crackdown on dissent and free speech.
While the corporate sector could band together to lobby to protect these institutions, many multinational companies and expatriate executives are voting with their feet, and leaving the city instead, the research finds.
There's been an outflow of U.S. companies that have their regional headquarters in Hong Kong for the last decade, a trend that became particularly pronounced in the last two years. You'd have to go back to 2013 to find a year in which the number of U.S. regional headquarters in Hong Kong rose.
Since then, 187 U.S. regional Asia hubs have moved away from Hong Kong, according to the tracking in the report. And the trend is picking up pace -- 39.6% of the relocations came just in the last two years.
Interestingly, Japanese companies show similar trends over a longer period of time. The ranks of "Japan Inc." operating out of a Hong Kong base for Asia ex-Japan have thinned most years since 2010, a reversal of a very strong movement to Hong Kong by Japanese companies prior to that. Their departures were also particular intense in the last two years.
To reinvigorate Hong Kong and reclaim some of its image, multinational companies must lobby both the Beijing and Hong Kong governments "as a political campaign," rather in the normal government-relations approach, the report states. International pressure can reinforce the necessary strengths that previously made Hong Kong attractive: faith in the rule of law, judicial independence, and the free flow of capital.
"It also increases the importance of the number of foreign employees working in Hong Kong, as a declining trend shows how some professionals are voting with their feet," the new report finds.
The research paper, Fractured foundations: Assessing risks to Hong Kong's business environment, is an interesting and level-headed look at the current situation in Hong Kong. You can find a copy of it here.
It's put out by the Atlantic Council and written by Logan Wright, a partner at the Rhodium Group who heads its research into Chinese markets. Wright spent two decades in Hong Kong and Beijing before relocating to Washington, D.C.
There's a reason the Hong Kong government has recently started a charm offensive, giving away 500,000 air tickets to the city, and hosting international conferences designed to bring financiers and executives back to town. Hong Kong knows it has an image problem.
That's where business pressure can come in, the report suggests. Companies should convey their uncertainty about the future of Hong Kong's status directly to Beijing officials, if possible. They can also link business decisions on job creation and investment to issues such as the imposition of the National Security Law, which essentially imported much of Beijing's law to Hong Kong and has eliminated dissent and political opposition.
"With political norms now dictating the restraints on government action in Hong Kong, there are few institutional obstacles in Hong Kong's current legal environment to the continued erosion of the rule of law and judicial independence," Wright notes.
Companies face a growing regulatory burden to operate in Hong Kong, given the need to satisfy, for instance, U.S. sanctions on certain individuals and companies, while also making sure they don't fall afoul of the new Chinese-imposed laws. This is increasing the compliance cost for financial institutions in particular, for instance making it harder to structure portfolios that invest in the Hong Kong market but avoid companies that can't be held by U.S. investors. Wealth managers also have a greater "know your customer burden" to avoid sanctioned individuals.
There are further concerns such as data handling between Hong Kong and the rest of the world, and Hong Kong and China. Plenty to keep tabs on, in other words, all factors raising the cost of doing business in Hong Kong and decreasing its attractiveness to some degree.
The report encourages international companies to keep track of the national-security cases making their ways through the courts here in Hong Kong, and to monitor the functions of the Hong Kong legal system objectively. Companies should also push back on the crackdown on the free sharing of information and the independent media in Hong Kong, the report states.
As 2047 approaches, the issue will come to the fore as to whether Beijing will retain the Hong Kong dollar, with its peg to the U.S. dollar. It is "highly unusual" for one sovereign nation to operate two currencies, the report notes, particularly when they are governed by different monetary policies given the currency peg.
But Hong Kong's credibility as a financial center relies in large part on the free flows of capital through the city. That's enabled by a separate currency, given the highly restricted trading of the Chinese yuan. The risk to the Hong Kong dollar will come from Beijing, and political considerations. However, any move to peg the Hong Kong dollar to the yuan would necessitate tighter controls between Hong Kong and the rest of the world, to prevent capital flight out of the Chinese currency via Hong Kong.
Hong Kong relies on "free and open" capital flows as its reason for being. So changes to the Hong Kong dollar's currency peg would raise fresh questions about the city's role as a free market. "Those fears alone could start to diminish Hong Kong's attractiveness as a financial center," the report notes. The falling of the Hong Kong dollar peg is a risk to watch, in other words.
Hong Kong's population has now fallen for three years in a row. A low birth rate and immigration is reflected in those trends, with newcomers from mainland China not offsetting the outflow. There's been a net loss of almost 200,000 people, bringing the total number of Hong Kongers down to 7.3 million.
"After significant legal and institutional changes, the decision to 'vote with one's feet' was the last form of meaningful popular franchise still available in Hong Kong," the report notes.
The city has a battle on its hands to reverse such trends. International companies should pressure the government to retain what makes business in the city attractive while attempting to prevent further erosion of Hong Kong's social environment.
"The obstacles to further changes in Hong Kong's environment will be political, and collective lobbying and public relations by the business and financial community can shape the political calculus in Hong Kong and Beijing," Wright concludes.
