Don’t write off Hong Kong: it is still a crucial gateway to China

As Hong Kong’s annus horribilis comes to an end, last New Year’s celebratory mood over its emergence as the world’s top IPO market may seem a distant memory.

The long-running protests are bringing into question the safety, rule of law and convenience that have underpinned Hong Kong’s attractions as a global financial centre. In the third quarter, the territory even slipped into recession for the first time in a decade.

So can the Year of the Rat, the first year in the Chinese zodiac, bring a fresh start? A recent survey shows nearly a quarter of businesses are thinking of leaving Hong Kong, with Singapore the preferred destination. Some 80 per cent say the protests have affected their investment outlook regarding Hong Kong.

Meanwhile, reports are emerging that Asian wealth is on the move with Goldman Sachs reporting in October that as much as $4 billion in deposits may have already left Hong Kong for Singapore.

“Ultimately what we’re thinking about is which financial centre in Asia is truly the international abode for capital. Is it Hong Kong, is it Singapore?” JP Morgan analyst Harsh Modi recently told CNBC. “My sense is … it looks like it is more Singapore. The flow from what we see right now appears to favour Singapore.” 

But it may be unwise to bet against Hong Kong’s long-term future. The main reason? It’s the world’s gateway to China. Any foreigner who wants to access the massive growth and innovation potential of the world’s second-largest economy – from biotech to artificial intelligence – needs Hong Kong to be the go-between.

Nearly two-thirds of China’s inward and outward foreign investment is channelled through Hong Kong. And there’s a relationship of mutual dependency. Beijing craves foreign capital as much as overseas investors want to tap its markets. That means it has a strong interest in preserving Hong Kong’s special role as its broker to the world.

That leads to Hong Kong’s second trump card in weathering the protest storm: its continued attraction as an IPO hub. After a sluggish first half, Hong Kong’s IPO activity went into overdrive – even as the protest crisis intensified. In fact Hong Kong once again has taken the global listings crown in 2019, according to KPMG, with nearly $40 billion raised.

Alibaba led the charge raising $11.2 billion in the biggest IPO of the year, surpassing Uber’s record $8.1 IPO in May. Another mega-deal was Budweiser Asia’s $5.8 billion IPO in September. But the energy was driven by a string of smaller IPOs fostered by a regulatory overhaul that set off the 2018 boom in the first place. KPMG says that in 2019, Hong Kong clinched a record 145 Main Board listings, a jump from 130 in 2018.

Much of Hong Kong’s wealth derives from being built on the priciest land on the planet. Will the protests topple it from such giddy heights? There are certainly signs of investors and homeowners leaving the market, with property agents reporting a sharp fall in transactions. Even in good times, values of $2,091 per square foot – four times the price in New York – hardly sound sustainable.

But Hong Kong property prices are kept stratospheric by careful government regulation of supply. Stretches of prime Hong Kong land lay undeveloped. By selling off a few chunks at a time, Hong Kong fills public coffers and keeps taxes low. Price drops are therefore likely to lure buyers seeking bargains, on the expectation that Hong Kong’s turmoil will eventually subside.

And the turmoil will indeed one day subside. It’s the how and the when that are burning questions. If the Year of the Rat turns out to be an auspicious one, Hong Kong’s star can be expected to shine bright for a long time.