The “Pearl of the Orient”
In the late 1800s, Hong Kong rose to international prominence when it acted as a base of operations for British colonial trade, effectively bridging the prosperous West and emerging Eastern world. And while modern-day Hong Kong has certainly evolved over the past two centuries, its role in the global economy has remained largely unchanged. How can the GDP of this tiny 1000 square-kilometer city rival that of Denmark, Norway, and South Africa? How is it possible for a territorial region whose independence has been in dispute for decades to become the financial “Mecca” of Asia? And finally, what will the world events of 2019 and 2020 mean for this minute economic powerhouse?
New York, London, and Hong Kong are the 3 largest financial centers on the planet: the big apple is home to the New York Stock Exchange as well as the Nasdaq, the 2 largest security exchanges in the world; London is the go-to financial center for Europe, whereas Hong Kong is responsible for raising capital primarily for Chinese corporations.
China has quickly become the 2nd largest economy on earth and, along with that growth, has come the rise of Chinese companies like Huawei, Alibaba, and Tencent. Like any public company these businesses need to raise money to finance their operations; however, because China’s less than transparent financial sector is largely closed-off to the rest of the world, Hong Kong plays the vital role of China’s portal for accessing the international capital markets. The Hong Kong Stock Exchange publicly lists a unique selection of corporations: on the one hand, there are regular international companies such as HSBC and Tencent, but there are also many companies that one would not really expect, such as “China Construction Bank”, “PetroChina”, and “China Mobile”, all state-owned mainland Chinese companies. Why do these companies, many of which are directly subsidized by the Chinese government list on an international exchange rather than a domestic one?
The answer is quite simple: by listing on a reputable international exchange, companies can not only raise cash but also raise their credibility, which opens the door for raising even more money from international investors. Due to incredibly strict capital controls on the mainland, a lot of Chinese companies find it hard to do business internationally, but by having a presence in a market like Hong Kong, they can get the funding they need to finance their operations. As China looks to expand its influence internationally through programs like “One Belt - One Road”, its state-owned corporations will have to work more and more together with international companies, and having well respected and publicly listed companies is extremely helpful to this purpose. Raising capital tough doesn’t happen exclusively in the stock exchanges. Hong Kong is a major center for investment banks, that are looking to underwrite traditional loans for promising companies; as you can imagine, being the home of IPOs, capital raises, and loan origination during the longest economic expansion in history has been enormously profitable for the city.
Hardships and Challenges
Shanghai’s fierce competition
Since its handover to China in 1997, the area has not been led by a president or a governor, but a Chief Executive; this represents a leadership structure that is much closer to a corporation than a government. Corporations though have competition and Hong Kong is no exception: Shanghai, the financial capital of mainland China, is the first problem that Hong Kong is starting to come up against. The Shanghai Stock Exchange is rapidly growing in size, and regular Chinese companies are increasingly choosing to list here rather than on the Hong Kong Exchange.
The first reason for this is that it is much easier for a Chinese company to list in Shanghai: Hong Kong uses a different currency, has different capital controls, and additional order requirements. Moreover, the Chinese government has massively supported these mainland Exchanges, in an attempt to limit the influence that Hong Kong has over the finances of China.
All this said it is not an easy pitch for Shanghai, as Chinese capital controls prohibit companies from issuing shares at a lower price than what their assets are worth, essentially meaning that mainland-listed companies cannot raise new funds if their stocks fall too low. For example, after the market plunge of early 2020 (stock prices fell low), trading on much of the Shanghai Stock Exchange was halted entirely.
Riots
Nevertheless, China’s economy is not the only threat to Hong Kong: protests among residents and police have raged across the city for almost two years now, which has put tremendous pressure on other industries that could have otherwise “picked up the slack” of the waning financial sector. The first industry that was affected by riots is tourism: the city is a major destination with world-class restaurants, landmarks, and nightlife, and its airport is the major travel hub for the region. On the other hand, the lucrative retail industry is struggling just as much, if not more: Hong Kong is one of the largest luxury goods markets in the world, which employs hundreds of thousands of the city’s workforce. The protests have frequently occupied shopping malls as bases of operation, completely shutting down some of the city’s largest retail centers. This put shop owners and retail workers out of business causing direct structural unemployment.
Real Estate: all demand, no supply
Another major issue regards the real estate sector: Hong Kong has the most expensive real estate market in the world, as the actual space to accommodate the almost 8 million residents is incredibly limited, and most of the land is protected as “public parks”. While the ridiculously high prices have driven a lot of people out of the housing market, forcing them to live in subhuman conditions and increasing the already massive wealth inequality in the region, the government has constantly tried to maintain this steady price growth because the investment into family homes and commercial real estate is a major market on the island. To achieve this, the government has been very slow with rolling out land reclamation projects or even opening existing land for development. You cannot buy land in Hong Kong: you must rent it from the government for 50 years at the time. The revenue of these rents is vital for the city’s public administration, as it makes up for the extremely low income taxes but, at the same time, has generated a vicious cycle of dependency on ever-increasing real estate prices.
Response to the crisis and prospects
Despite all these issues, what we must not overlook is the city’s amazing economic resilience: the events of the last decade would have crippled any regular economy, especially when you consider an economy entirely located within one city. Hong Kong instead is still growing at a fast pace, and not all its success has come from exploiting the success of China; the city has shown times and times again to be extremely financially responsible, as it has managed to keep consumer, business, and government debt very low, despite the high costs of living and real estate prices. What this means is that while these external shocks have been bad, they have not been nearly as damaging as they would have been to a regular developed economy. To simplify let’s say that debt makes good times great, and bad times terrible: Hong Kong has managed to have a great growth period without the need to take on lots of debt and, therefore, during more trying times, it is not suffering the same way that other (less responsible) economies would.
Over the next decades, Hong Kong is likely to maintain, at least on an economic level, a crucial role as an intermediary between the western powers and the still-growing China, with one massive asterisk: in 1997, Hong Kong was handed over to the People’s Republic of China from the U.K. However, british Prime Minister Margaret Thatcher imposed the condition that Hong Kong would remain largely independent from both an economic and administrative point of view (within the so-called “one state, two systems” paradigm). The deal will expire in 1947, and no one can say for sure what will happen to the ex-British colony in the next 30 years.
Edoardo Pelli
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In the late 1800s, Hong Kong rose to international prominence when it acted as a base of operations for British colonial trade, effectively bridging the prosperous West and emerging Eastern world. And while modern-day Hong Kong has certainly evolved over the past two centuries, its role in the global economy has remained largely unchanged. How can the GDP of this tiny 1000 square-kilometer city rival that of Denmark, Norway, and South Africa? How is it possible for a territorial region whose independence has been in dispute for decades to become the financial “Mecca” of Asia? And finally, what will the world events of 2019 and 2020 mean for this minute economic powerhouse?
New York, London, and Hong Kong are the 3 largest financial centers on the planet: the big apple is home to the New York Stock Exchange as well as the Nasdaq, the 2 largest security exchanges in the world; London is the go-to financial center for Europe, whereas Hong Kong is responsible for raising capital primarily for Chinese corporations.
China has quickly become the 2nd largest economy on earth and, along with that growth, has come the rise of Chinese companies like Huawei, Alibaba, and Tencent. Like any public company these businesses need to raise money to finance their operations; however, because China’s less than transparent financial sector is largely closed-off to the rest of the world, Hong Kong plays the vital role of China’s portal for accessing the international capital markets. The Hong Kong Stock Exchange publicly lists a unique selection of corporations: on the one hand, there are regular international companies such as HSBC and Tencent, but there are also many companies that one would not really expect, such as “China Construction Bank”, “PetroChina”, and “China Mobile”, all state-owned mainland Chinese companies. Why do these companies, many of which are directly subsidized by the Chinese government list on an international exchange rather than a domestic one?
The answer is quite simple: by listing on a reputable international exchange, companies can not only raise cash but also raise their credibility, which opens the door for raising even more money from international investors. Due to incredibly strict capital controls on the mainland, a lot of Chinese companies find it hard to do business internationally, but by having a presence in a market like Hong Kong, they can get the funding they need to finance their operations. As China looks to expand its influence internationally through programs like “One Belt - One Road”, its state-owned corporations will have to work more and more together with international companies, and having well respected and publicly listed companies is extremely helpful to this purpose. Raising capital tough doesn’t happen exclusively in the stock exchanges. Hong Kong is a major center for investment banks, that are looking to underwrite traditional loans for promising companies; as you can imagine, being the home of IPOs, capital raises, and loan origination during the longest economic expansion in history has been enormously profitable for the city.
Hardships and Challenges
Shanghai’s fierce competition
Since its handover to China in 1997, the area has not been led by a president or a governor, but a Chief Executive; this represents a leadership structure that is much closer to a corporation than a government. Corporations though have competition and Hong Kong is no exception: Shanghai, the financial capital of mainland China, is the first problem that Hong Kong is starting to come up against. The Shanghai Stock Exchange is rapidly growing in size, and regular Chinese companies are increasingly choosing to list here rather than on the Hong Kong Exchange.
The first reason for this is that it is much easier for a Chinese company to list in Shanghai: Hong Kong uses a different currency, has different capital controls, and additional order requirements. Moreover, the Chinese government has massively supported these mainland Exchanges, in an attempt to limit the influence that Hong Kong has over the finances of China.
All this said it is not an easy pitch for Shanghai, as Chinese capital controls prohibit companies from issuing shares at a lower price than what their assets are worth, essentially meaning that mainland-listed companies cannot raise new funds if their stocks fall too low. For example, after the market plunge of early 2020 (stock prices fell low), trading on much of the Shanghai Stock Exchange was halted entirely.
Riots
Nevertheless, China’s economy is not the only threat to Hong Kong: protests among residents and police have raged across the city for almost two years now, which has put tremendous pressure on other industries that could have otherwise “picked up the slack” of the waning financial sector. The first industry that was affected by riots is tourism: the city is a major destination with world-class restaurants, landmarks, and nightlife, and its airport is the major travel hub for the region. On the other hand, the lucrative retail industry is struggling just as much, if not more: Hong Kong is one of the largest luxury goods markets in the world, which employs hundreds of thousands of the city’s workforce. The protests have frequently occupied shopping malls as bases of operation, completely shutting down some of the city’s largest retail centers. This put shop owners and retail workers out of business causing direct structural unemployment.
Real Estate: all demand, no supply
Another major issue regards the real estate sector: Hong Kong has the most expensive real estate market in the world, as the actual space to accommodate the almost 8 million residents is incredibly limited, and most of the land is protected as “public parks”. While the ridiculously high prices have driven a lot of people out of the housing market, forcing them to live in subhuman conditions and increasing the already massive wealth inequality in the region, the government has constantly tried to maintain this steady price growth because the investment into family homes and commercial real estate is a major market on the island. To achieve this, the government has been very slow with rolling out land reclamation projects or even opening existing land for development. You cannot buy land in Hong Kong: you must rent it from the government for 50 years at the time. The revenue of these rents is vital for the city’s public administration, as it makes up for the extremely low income taxes but, at the same time, has generated a vicious cycle of dependency on ever-increasing real estate prices.
Response to the crisis and prospects
Despite all these issues, what we must not overlook is the city’s amazing economic resilience: the events of the last decade would have crippled any regular economy, especially when you consider an economy entirely located within one city. Hong Kong instead is still growing at a fast pace, and not all its success has come from exploiting the success of China; the city has shown times and times again to be extremely financially responsible, as it has managed to keep consumer, business, and government debt very low, despite the high costs of living and real estate prices. What this means is that while these external shocks have been bad, they have not been nearly as damaging as they would have been to a regular developed economy. To simplify let’s say that debt makes good times great, and bad times terrible: Hong Kong has managed to have a great growth period without the need to take on lots of debt and, therefore, during more trying times, it is not suffering the same way that other (less responsible) economies would.
Over the next decades, Hong Kong is likely to maintain, at least on an economic level, a crucial role as an intermediary between the western powers and the still-growing China, with one massive asterisk: in 1997, Hong Kong was handed over to the People’s Republic of China from the U.K. However, british Prime Minister Margaret Thatcher imposed the condition that Hong Kong would remain largely independent from both an economic and administrative point of view (within the so-called “one state, two systems” paradigm). The deal will expire in 1947, and no one can say for sure what will happen to the ex-British colony in the next 30 years.
Edoardo Pelli
Want to keep up with our most recent articles? Subscribe to our weekly newsletter here.
