China’s growing role as an exporter of capital is opening up a golden opportunity for Hong Kong, which has been struggling with economic difficulties and social and geopolitical tensions. The city is well-positioned to serve the investment needs of Mainland Chinese who are sitting on massive bank deposits.
China has capital controls but Hong Kong is treated as a special case, with Beijing gradually easing restrictions to allow money to flow into the city under various schemes.
“To accelerate the development of our country into a financial powerhouse requires Hong Kong to become an even stronger international financial centre,” He Lifeng, China’s vice premier and top economic official, said at the Global Financial Leaders Summit hosted by the city in November.
Hong Kong’s stock market has been held back by low investment demand for some years now Out of the 473 initial public offerings in the past five years, 81% are trading below their offer price. The Hang Seng Index declined 16% over the past ten years, a period during which the S&P 500 index in New York surged 187%.
Trading volume is lacklustre. Average daily turnover thus far is HK$128 billion (US$16.5 billion), less than the levels three or four years ago. By contrast, the Shanghai and Shenzhen exchanges are the second largest in the world after the US, with combined daily turnover that’s about five to six times larger than Hong Kong.
The weakness of Hong Kong’s market is reflected in the fact that shares of Chinese companies with listings in the city and the Mainland and with the same voting and dividend rights trade at very different prices.
On average, Mainland-listed A shares trade at a 48% premium over the same Hong Kong-listed H share. The price gap is wider than historical standards.
It’s clear that Hong Kong’s stock market isn’t in good shape. Interest has been dampened by various factors, including the economic slowdown in China. As much as 80% of Hong Kong’s market capitalisation is based on listing Mainland companies. Covid-19, geopolitical and social tensions and the pull of the bull market in New York have also weighed on investor interest.
Hong Kong’s financial services industry has responded by cutting staff and taking other measures to reduce costs, which has had negative multiplier effects on the whole economy.
Potential game changer
The Mainland’s emergence as a major exporter of capital, with Hong Kong as the key offshore service centre for such outflows, is a potential game changer.
Around one billion out of China’s 1.4 billion people keep their money in low-yielding bank deposits. They currently have a mind-boggling 137 trillion RMB ($19 trillion) saved in bank deposits, a record sum that exceeds their own household spending, and equivalent to more than 110% of the national gross domestic product.
Savings have piled up because investors have lost confidence in real estate, which used to take up as much as two-thirds of the money. In a historic shift, the biggest allocation now is to bank deposits, which represent 46% of all savings. Only 18% and 11% of savings, respectively, go into property and investments in stocks and funds, according to official figures.
But investors only earn 1.5%-2.5% annually on the deposits, which is a motivation to diversify into more attractive investments. This gives China’s stock markets as well as Hong Kong a huge opportunity to capture business.
Chinese regulators are taking measures to lift the quality of listed companies to encourage investors to switch from deposits to stocks. Beijing announced a “Nine Point Plan” in April to improve corporate governance and enhance dividends and share buybacks.
The plan seems to be working.
In Hong Kong, the stock exchange and officials from the government, regulatory and monetary agencies have fought long and hard to open up cross-border avenues to let the money come.
The Stock Connect scheme, which already contributes 17% of Hong Kong’s stock turnover and 7% in the Mainland’s, has been widened to include channels for trading bonds and exchange-traded funds. The next step could see the addition of ETFs in fixed income and commodities, including gold.
An IPO Connect would be a crowning achievement if permitted by Beijing as this would allow investors in the Mainland to participate in IPOs in Hong Kong.
The Mutual Recognition of Funds scheme allowing retail distribution of funds is another major step. Hong Kong would like Mainland insurers to be added to the list of eligible investors in MRF-approved funds.
There is also the new Wealth Management Connect scheme specially tailored for the Greater Bay Area, which lets residents in the area invest directly in funds across borders.
Hong Kong is also pushing into the family office sector. It may even overtake Switzerland to become the world leader in the sector by the end of the decade.
It’s also important for Hong Kong to convince Beijing to drop a tax on dividends paid to investors in the Mainland who hold Hong Kong-listed Chinese stocks.
As the biggest global centre for trading offshore renminbi, Hong Kong also has RMB-denominated products, widening its product menu and improving its ability to facilitate the internationalisation of the Chinese currency.
No one thought that China’s property bust would have the unintended consequence of freeing up capital that could feed Hong Kong’s market. For Hong Kong, no alternative source of money with comparable potential is available.
Outside China, the world’s asset management industry is dominated by Western fund managers, whose view on Chinese equities is generally negative, resulting in outflows.
As for stories of Middle Eastern wealth, thus far, it’s been a lot of sizzle but little steak from the Hong Kong perspective. Hong Kong also hopes to attract more funds from Southeast Asia but would have to compete with Singapore.
*Cheah Cheng Hye is the head of Hong Kong asset management firm Value Partners Group. He is also an independent non-executive director of Hong Kong Exchanges and Clearing Ltd., which owns the Hong Kong bourse and the London Metals Exchange, and chairman of the group’s investment committee. He is a founding member and former co-chairman of the Malaysian Chamber of Commerce in Hong Kong and Macau.
