Hong Kong's Global Financial Centre and China's Development

Changing Roles and Future Prospects

Yan-leung Cheung, Yuk-shing Cheng, Chi-keung Woo

• Publisher: Routledge
• Year: 2016
• Topic: Social Sciences
• eBook ISBN:
  9781317284765
• Subtopic: Ethnic Studies
• Index: Social Sciences

This book provides an overview of Hong Kong's role as an international financial centre, focusing especially on how Hong Kong has contributed significantly, and continues to contribute significantly, to China's economic development. It considers the importance of Hong Kong's stock market in raising finance for Chinese companies, explores the potential of Hong Kong as an offshore financial centre, and discusses recent regulatory reforms. It concludes by assessing the prospects for Hong Kong's continuing success as a global financial centre, and puts forward recommendations for policies which would help secure continuing success.

1  Hong Kong as an International Financial Center

Hong Kong is a financial center with global competitiveness, best illustrated by “Nylonkong” (“New York, London, Hong Kong”) – a phrase used in a TIME magazine article published in 2008 to describe the three most important cities in the world. According to the Global Financial Centers Index (GFCI) compiled by the London-based corporation Z/Yen, Hong Kong has been ranked third in all of the semi-annual assessments since 2007, steadily raising its score against London and New York (see Figure 1.1). Similarly, the Xinhua-Dow Jones IFC Development Index ranked Hong Kong third to fifth during 2010–14. The Banker also indicated Hong Kong rose from being sixth in 2010 to fourth in 2013–14 (see Table 1.1).

In the 1980s, Hong Kong was at best a regional financial center (Jones, 1992; Jao, 2003). Since then, it has strengthened and improved its international status, thanks to the rise of the Chinese economy in the past two decades.

Figure 1.1 Global Financial Centers Index

Source: Authors’ compilation based on the information from Z/Yen available at www.zyen.com/research/gfci.html (accessed 2 February 2015)

Table 1.1 Ranking of Hong Kong among financial centers worldwide

Underpinning this period of development is China’s incremental reform approach that resulted in an inefficient financial system in the Mainland. To improve fund allocation within the Mainland, the Chinese government selected some companies to raise funds in Hong Kong’s banking system and stock market. This has led to a growing share of Mainland companies in the Hong Kong stock market’s capitalization, turnovers and number of initial public offerings. Along with the growing presence of Mainland companies, the demand for legal, consulting and accounting services in Hong Kong has been increasing, thus strengthening Hong Kong’s position as an international financial center (IFC).

After the 2008 global financial crisis, China decided to actively address the long-existing macroeconomic imbalances and enhance its influence in the international financial theater. For years, China has had annual trade surpluses and maintained net capital inflows, leading to the accumulation of a huge amount of international reverses mostly invested in US Treasury bills and bonds. When the US adopted the quantitative easing policy, the resulting depreciation of the US dollar put China’s international reserves at great risk. China’s new strategy encourages capital outflows through gradually removing capital controls, as well as pushing Chinese enterprises to “go out” (or “go global”). To counter the US dollar’s dominance in the international financial system, China has shown strong interest in internationalizing the Renminbi (RMB).

As its capital account is not fully convertible, China has chosen a unique path in its RMB internationalization by establishing offshore RMB business centers with controllable connections to the financial system of Mainland China. To this end, China started with trade settlement in RMB in 2009. Subsequent policies have helped the development of RMB-based investment products. With China’s blessing, Hong Kong has become a premier offshore center for RMB business. With an initial successful experience in Hong Kong, China has encouraged developing offshore RMB markets within and outside the Mainland.

To link RMB internationalization with domestic financial reforms, China set up in late 2013 the China (Shanghai) Pilot Free Trade Zone (commonly called the Shanghai Free Trade Zone) to house an offshore financial system within the Mainland. Another eye-catching move was the November 2014 opening of the Shanghai-Hong Kong Stock Connect that enables across border trading of stocks in RMB.

All these measures have direct bearings on the future IFC development of Hong Kong. If Hong Kong can exploit the new opportunity to develop itself into a major offshore RMB center, its position as a global financial center will be sustained. There are, however, challenges ahead. The strong China-element in Hong Kong’s financial center means any setback in China’s financial reforms and RMB internationalization could adversely affect Hong Kong. Moreover, further opening up of China’s financial system would engender financial centers (e.g., Shanghai and Shenzhen) in the Mainland that could compete with Hong Kong. Many overseas financial centers are also keen to get a slice of the growing pie of RMB business. Whether these centers are complementary to or competing with Hong Kong is of strategic importance for Hong Kong’s financial sector.

In summary, Hong Kong has grown from a regional to a global financial center, due largely to its significant contributions to China’s economic development. Its future development hinges on its ability to seize the opportunity provided by China’s new strategy. This book aims to assess Hong Kong as an IFC for China’s economic development. In so doing, it answers the following research questions:

• Chapter 2: What has been Hong Kong’s role in China’s economic development since Deng Xiaoping’s reform initiation in 1978?
• Chapter 3: What can Hong Kong learn from the global international financial centers in its own development in anticipation of China’s on-going RMB internationalization and “going out” strategy?
• Chapter 4: What is Hong Kong’s performance as an offshore RMB business center?
• Chapter 5: Who are the major non-Mainland competitors of Hong Kong in the offshore RMB business?
• Chapter 6: What is the genesis of the major Mainland offshore RMB business centers?
• Chapter 7: Is Hong Kong competitive from the perspective of its financial sector?
• Chapter 8: Is Hong Kong competitive from the perspective of its users of financial services?
• Chapter 9: What’s next for Hong Kong to prepare for the inevitable: China’s RMB internationalization?

We would be remiss had we claimed our book was delivering the definitive verdict on what Hong Kong should or should not do in the next few years. Nonetheless, we sincerely hope that our book can quickly inform the reader of the key messages distilled from a large body of documents and data not easily accessible to the general public. Achieving this modest goal, we believe, will help inform the policy debate on Hong Kong’s IFC future.

2 Hong Kong’s financial center and China’s development

2.1 Introduction

What has been Hong Kong’s role in China’s economic development since Deng Xiaoping’s reform initiation in 1978? Our answer is as follows. Hong Kong has been and still is a major fundraising center for China. China’s fundraising in Hong Kong directly improves the corporate governance of Chinese companies listed in Hong Kong’s stock exchange. The adopted corporate governance of these listed companies in turn affects other Mainland companies. Hong Kong banking sector’s financing of the Mainland companies’ operations and investments has been rising, in tandem with China’s economic growth. Hong Kong’s offshore RMB business sees exponential growth, chiefly driven by China’s “going out” strategy and RMB internationalization.

While the answer is an assessment of Hong Kong’s role and performance to date as an international financial center (IFC) for China’s economic growth, it is not a forward looking projection of what’s next for Hong Kong in anticipation of China’s accelerating RMB internationalization and “going out” policy initiatives. That projection will come in the subsequent chapters of this book.

This chapter proceeds as follows. Section 2.2 examines Hong Kong’s stock market as a fundraising center of China. Section 2.3 details how Hong Kong has helped improve the corporate governance of Chinese companies listed in the Hong Kong Exchanges and Clearing (HKEX). Section 2.4 highlights the growing participation of Hong Kong’s banking sector in financing Mainland companies’ economic activities. Section 2.5 discusses the opportunities offered by China’s “going out” strategy and RMB internationalization. Section 2.6 concludes the chapter.

2.2 The fundraising function of Hong Kong stock market

Mainland companies have gone through several stages of fundraising via Hong Kong’s stock market. In the mid-1980s, Mainland companies achieved back-door listing by significant stake building, leading to the so-called “red-chip” companies.¹ Prominent cases include the acquisition of (a) Conic Investment by China Resources (Holdings) and Bank of China (Hong Kong) in 1984; (b) Ka Wah Bank in 1986 and Tylfull Company in 1990 by the Hong Kong subsidiary of the CITIC Group; and (c) Union Globe Development by Guangdong Companies Holdings (Yi, 1997; Feng, 2002; de Jonge, 2008).

The listing of H-share companies in Hong Kong in the early 1990s marks the beginning of the second stage of development. Following Deng Xiaoping’s famous 1992 tour to South China, China initiated a wave of marketization reforms, including the restructure of state-owned enterprises into modern corporations listed in a stock market (Tenev, Zhang, and Brefort, 2002; Cheng and Chung, 2013).

In 1993, Tsingtao Brewery Company Limited became the first H-share company listed in the Hong Kong’s stock exchange. Unlike their red-chip counterpart, H-share companies are registered in the Mainland. The HKEX now houses large state-owned companies in various industries, exemplified by the Hang Sang China Enterprises Index (HSCEI) companies engaging in such diverse businesses as aviation, banking, energy, insurance, railway, telecom, and real estate (Feng, 2002; Guo, 2007, 2009; Kong and Yan, 2009).

China’s 2001 entry into the World Trade Organization accelerated the pace of Mainland companies’ listing overseas. In 2003, PICC Property and Casualty Company Limited went public in Hong Kong, launching the internationalization of China’s financial industry. Led by the Bank of Communications, state-owned commercial banks set off a boom in H-share listings in 2005, followed by other large state-owned enterprises.

Since 2007, Mainland private enterprises (MPEs) have been raising funds in Hong Kong, thanks to China’s liberal approach adopted in the early 2000s towards MPE listings in overseas markets. In particular, abolishing the “No. 72 Document” in 2003 removed many barriers for MPEs to go overseas, aiding their increasing presence in the HKEX (An, 2013).

Figure 2.1 shows the...

Table of contents

• Cover
• Title
• Copyright
• Contents
• List of figures
• List of tables
• Foreword
• Preface
• 1 Hong Kong as an international financial center
• 2 Hong Kong’s financial center and China’s development
• 3 International Financial Centers and offshore finance
• 4 Hong Kong as an offshore RMB business center
• 5 Development of other RMB business offshore centers
• 6 Offshore RMB centers in Mainland
• 7 View from the market participants in Hong Kong’s financial sector
• 8 View from Hong Kong’s Chinese firms
• 9 Conclusion
• References
• Index