2023 was a challenging year for Hong Kong’s role as an international financial centre. The rapid reopening of both Mainland China and Hong Kong from the beginning of the year fueled high expectations of rapid economic and financial rebounds in both locales. However, recovery has proven slower than expected. This resulted from various structural challenges in the Mainland economy, in particular ongoing problems in the property sector, weak consumer spending, and continuing geopolitical issues. The combination led to slower growth in the Mainland throughout the year. On top of all this, Hong Kong faced rapid increases in US interest rates, which feed directly into the city via the Hong Kong dollar-US dollar linked exchange rate system.
These and other factors have resulted in one of the lowest figures for funds raised through stock exchange initial public offerings (IPOs), which fell to a 20-year low at the end of 20231.[1]
What does the future hold for Hong Kong as an international financial centre?
Looking ahead to 2024, three key elements are central going forward: the factors underlying Hong Kong’s evolution into one of the world’s major financial centres, the breadth of its role, and structural changes particularly over the period 2019-2023.
Emergence as a major international financial centre
Hong Kong’s emergence as a major international financial centre arguably began in October 1987, in the wake of the global market crash triggered by the record ‘Black Monday’ market drop in the US. The turmoil led to the closure of the Hong Kong Stock Exchange and the Hong Kong Futures Exchange, and the failure and subsequent bailout of the futures clearing house, the Hong Kong Futures Guarantee Corporation.[2]
Following the crash, Hong Kong undertook a comprehensive review of its financial system to address regulatory and infrastructural weaknesses. This led to the creation of the Hong Kong Securities and Futures Commission in 1989 and the creation of Hong Kong Exchanges and Clearing (HKEx), merging the stock, futures and clearing companies into a single company listed on the Hong Kong Stock Exchange. Related to an earlier crisis which led to the establishment of the linked exchange rate system in 1983, the Hong Kong Monetary Authority was established in 1993, combining the functions of monetary system maintenance with banking supervision to form the territory’s central bank. This established the fundamental infrastructure for Hong Kong’s financial system. This infrastructure was then put to use as China began its process of economic reform and liberalisation, particularly in channelling foreign investment through a familiar legal framework in Hong Kong combined with fundraising by Chinese enterprises from the early 1990s.
By the time of Hong Kong’s handover to China and the Asian Financial Crisis, both in 1997, Hong Kong had emerged as a significant regional centre. The Asian Financial Crisis in particular proved a major test of Hong Kong’s financial system. It also proved a major opportunity for Hong Kong to enhance its financial regulatory framework and financial infrastructure following the 1997 crisis. This process was supported by a clear foundation elaborated in Hong Kong’s Basic Law, which established the One Country, Two Systems arrangement in the context of money and finance. This supported Hong Kong’s emergence as one of the world’s major financial centres in parallel to the re-emergence of China as one of the world’s major economies, particularly from its 2001 accession to the World Trade Organization.
During this period, despite the challenges of the 2008 Global Financial Crisis, Hong Kong experienced significant growth in its role as an international financial centre. After the 2008 crisis, not only did Hong Kong avoid the significant failures of many other jurisdictions, it arguably benefited both from China’s post-crisis stimulus and continuing growth, liberalization and reform, as well as international regulatory responses which over time saw major international financial institutions reorganizing around regional structures, including holding companies in Hong Kong and/or Singapore.
From 2008 to 2019, Hong Kong emerged as the major centre for flows in and out of China, as well as for fundraising by Chinese companies and investment into Chinese companies, albeit alongside New York and Shanghai/Shenzhen. Hong Kong also became central to RMB internationalisation efforts. Following significant financial volatility in Mainland China in 2015, Hong Kong’s position as the major international nexus for finance in and out of China was strongly reinforced, as efforts to liberalise finance and capital flows in and out of Mainland China slowed.
Up to the first half of 2019, Hong Kong could be seen as one of the world’s three leading financial centres, alongside London and New York, with a central role for the entire Asia timezone, a process which had been reinforced by the re-centering of many regional functions following the 2011 earthquake in Japan.
2019: Highpoint, turning point, or something else?
As an international financial centre, Hong Kong in 2019 was not only a clear leader in equity fundraising (as shown by HKEx IPO volumes) but also in Chinese and foreign company international and regional headquarters, by survey rankings such as those of Z/Yen, and by foreign exchange and derivatives volumes (as documented by the 2019 triennial survey of the Bank for International Settlements[3]).
In summary:
IPOs (2019 full year): 2nd globally, with 183 listings raising USD 40.1 billion[4]
AUM (2019): 20% annual increase to HKD 28.769 trillion (USD 3.694 trillion)[5]
Forex (daily, end April 2019): USD 632 billion (4th)
OTC interest rate derivatives (daily, end April 2019): USD 436 billion (3rd)
The period from 2019-2023 however has proven a major challenge for Hong Kong’s role as an international financial centre. It also is a period marked by structural change in the global, regional and Chinese economies, along with the role of Hong Kong.
One could argue that the first half of 2019 will historically be the high point for Hong Kong’s role as an international financial centre, after which – as with so many other financial centres throughout history around the world and in Asia – its role declines, to be taken by another. However, for a variety of reasons, I would suggest that this is not currently likely — in spite of the major challenges Hong Kong faced from mid-2019 to end-2022, including domestic instability, COVID and geopolitical tensions.
Rather I would suggest that 2019-2022 may mark a period of structural change for Hong Kong and its role as an international financial centre. This is significant because Hong Kong – and Southern China more generally – have gone through numerous periods of structural change. In Hong Kong these include its establishment (marking a major turning point in the roles of Macau and Canton), the Second World War (marking a major inflection point in the role of the UK), 1987 (as mentioned above) and 1997-2003 (covering the period of the handover, Asian financial crisis, dot-com crisis and SARS).
From the standpoint of 2019-2022, the central structural change stemmed from geopolitical tensions, particularly between the US and China. These however are partially reflective of a longer term evolutionary process, involving the relative reduction in the size of the US economy and the development of an increasingly multipolar global economy, with multiple drivers and multiple centers. In this framing, China – as one of the world’s largest economies, major trading nations and leading global investors and investment destination – has re-emerged as one of the driving poles, along with the US and Europe. Other potential drivers – including particularly India and ASEAN/Asia ex China – are also growing and developing rapidly. In this framing, particularly with questions around the reliability of the US-led monetary and financial infrastructure in the wake of the Russia-Ukraine war’s outbreak in 2022, each pole is both a financial area and the hinterland for a major financial center to serve its economy and interactions with other poles.
In this framing, Hong Kong and Singapore are competing less directly. Instead, they are more structurally and functionally different, with Hong Kong the centre for China and Singapore for Asia ex China. While China is growing more slowly, it nonetheless will remain one of the major economic and financial poles going forward. At the same time, as Asia ex China grows more rapidly, its need for its own center becomes clearer.
This can be seen from the continuing increase in foreign exchange, derivatives and assets under management in both jurisdictions. Hong Kong is the better center for China related finance while Singapore is much better for ASEAN and much of Asia ex China.
This does however mean structural evolution in both places. For Hong Kong, 2019 was not thus the highwater mark but rather the inflection point.
Looking forward
From this standpoint, what should Hong Kong do to enhance its role as an international financial center?
Clearly, the first must be to focus on maintaining and reinforcing its existing strengths vis-à-vis the Mainland: free movement of capital, information and people, supported by a predictable legal, monetary, financial and regulatory infrastructure. These are the areas where – without continued attention – Hong Kong is potentially at greatest risk of weakening its differentiation and comparative advantage against other competitors. At the same time, it must continue to reinforce its access with its hinterland – on which all financial centers ultimately depend – in this case, the Mainland. But Hong Kong’s role is fundamentally as an intermediary. This in turn requires increasing connections with corridors of continuing financial and economic linkages between the Mainland and the rest of the world (including Europe, North America and ASEAN/East Asia, particularly the RCEP region) but also seeking to identify emerging areas of potential opportunity (such as the Middle East, Africa and Latin America). It also means continually improving transactional infrastructure, particularly in relation to payments, where increasing multipolarity is an important trend and a major opportunity.
Looking forward, it is clear that Hong Kong’s role is – as it has over a number of occasions in the past – evolving in a new direction. Success is by no means certain but central will be the factors of openness, infrastructure, institutions and interconnections which have been central to its success in previous periods.
From the standpoint of the central areas:
Equity markets. It is important to not only maintain transparency, openness and regulatory quality but also to focus on new clients for fundraising and investment. For fundraising, perhaps the best opportunity comes from financing of innovation, technology and sustainable development. Each of these however requires both efforts from HKEx and regulators, and the development of a wider innovation ecosystem centered on Hong Kong,[6] not dissimilar to Silicon Valley. This has long been an objective: linking the technological strength of Shenzhen with the financial markets and infrastructure of Hong Kong. It has however not proven simple. With that said, attention to research and development funding and support as well as physical and data linkages offers the basis of the emerging center.
Assets under management. While AUM has increased (to HKD 30.541 trillion / US$3.912 trillion at end 2022), this is an area where there are both opportunities and risks. Central will be success in attracting Chinese institutional investors as and when they are able to invest more widely. In addition, efforts to attract private wealth are key in this respect. Key to this will be building the human capital necessary to provide necessary levels of expertise and service, an area where progress has been made but more needs to be done.
Structured finance. Central to foreign exchange and OTC derivatives are the attractiveness of Hong Kong’s legal and regulatory system, as well as its continued openness vis-à-via the Mainland. Going forward, further development will be heavily impacted by China’s growth and flows of funds in and out. Building multipolar payment and treasury management frameworks will also play an important role.
Payments and RMB internationalization. The decade-plus long RMB internationalization project was accelerating prior to recent increases in geopolitical tensions, particularly US and European responses to the Russia–Ukraine conflict. In addition to these structural changes, payments and liquidity infrastructure will be key to increasing external use via Hong Kong.[7] Beyond RMB internationalization, there are also wider opportunities to enhance Hong Kong’s role as a hub in the emerging multipolar financial system.
[1] Hong Kong IPO market revival on the cards amid favourable interest-rate outlook, China policy easing | South China Morning Post (scmp.com)
[2] See D. Arner et al., Financial Markets in Hong Kong: Law and Practice (Oxford University Press 2016 2d ed.)
[3] Triennial Central Bank Survey of Foreign Exchange and Over-the-counter (OTC) Derivatives Markets in 2019 (bis.org)
[4] Hong Kong’s IPO Market: Resilience and Innovation (ft.com)
[5] AWMAS_2019_EN.pdf (sfc.hk)
[6] R. Buckley, D. Arner & D. Zetzsche, FinTech: Finance, Technology and Regulation (Cambridge University Press 2024).
[7] Ukraine, Sanctions and Central Bank Digital Currencies: The Weaponization of Digital Finance and the End of Global Monetary Hegemony? – AsiaGlobal Papers No. 7 (hku.hk)