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How China is tightening its grip on Hong Kong’s economy

A shift that has been in progress since the handover in 1997.
Residential and commercial buildings are seen from Victoria Peak in Hong Kong, China. Image: Bloomberg

China is not only tightening its political grip on Hong Kong to rein in the restive city, it’s pushing harder to deepen its influence over the international finance hub’s business life.

From real estate to initial public offerings, debt issuance and telecommunications, mainland Chinese companies — many of which have government backing — are playing increasingly assertive roles in almost every corner of the city. It’s a shift that has been in progress since the handover in 1997.

While supporters of greater economic integration point to the growth-boosting impact of Chinese investment in Hong Kong, critics see it as yet another reflection of the city’s diminishing autonomy from the mainland. That concern has swelled in recent weeks after China said it would impose contentious national security legislation on Hong Kong, threatening the independence of a judicial system that has been a key draw for international companies and investors.

Riot police attempt to disperse crowds during a protest in Hong Kong, on June 12. Image: Justin Chin/Bloomberg

“Hong Kong is likely to develop into a Chinese offshore centre,’’ said Alicia Garcia Herrero, chief Asia-Pacific economist at Natixis SA. “As a national offshore centre, it may have some tax benefits, leeway in terms of issuing in dollar or attracting dollar investment. But it won’t be a global financial centre, where most of the players are global players.’’

Take something as simple as offices. While the numbers of outposts for Japanese or US companies has stayed broadly static over the past five years, the number of mainland Chinese companies with a foot on the ground has soared. Just in the past three months, CMB International Capital Corp, China Minsheng Banking Corp and Orient Finance Holdings have expanded their office space in the Central hub, according to people familiar with the matter.

As mainland Chinese companies are expanding, concern over the city’s future is growing among western companies. Over a quarter of companies questioned by the American Chamber of Commerce in Hong Kong this month said they were considering moving elsewhere. Nearly 40% of respondents said they were considering relocating personally as China pushes forward with a contentious new national security law that is seen eroding Hong Kong’s legal framework.

It’s also the case that these new mainland China offices are having a growing impact. Among the industries that have ramped up their presence are China’s state-backed brokerage houses, asset management companies and banks.

They’re increasingly arranging and buying offshore debt deals for the nation’s firms — displacing international firms in the city from the lucrative deals.

Chinese firms made up 12 of the top 20 bookrunners for Chinese dollar bond deals so far last year, up from just three a decade earlier, Bloomberg-compiled data show. They were responsible for arranging 60% of the funds raised in these deals last year, overtaking their international peers for the first time in 2018, according to the data.

The buyers of the deals are also increasingly wealthy investors in China and the region as a whole.

China’s offshore syndicated loan market is also become more and more dominated by the nation’s lenders, with Bank of China catching second place last year after HSBC Holdings Plc.  The proportion of total loan volume for Chinese companies provided by China’s financial institutions jumped to 48.5% in 2019 from 28.5% four years earlier.

A similar picture can be spotted for initial public offerings. More money was raised in Hong Kong than in New York last year, though it was mainly from mainland Chinese firms, with the Asian unit of Anheuser-Busch InBev a notable outlier.

And it’s been the Chinese banks that have expanded their market share in recent years, squeezing fees and putting pressure on their western rivals.

JD.com’s mammoth share sale this month means that right now UBS Group AG will be the only western bank in the top 10. A far cry from just a few years ago where the West’s leading investment banks regularly topped the table.

Things are also changing in the demographic makeup of the city. Immigrants into Hong Kong from mainland China have outstripped their international counterparts and are a key reason for the city’s population growth. This year, of course, that has slowed by the virus outbreak.

While Hong Kong’s role as a Chinese fund-raising centre is being strengthened, a status that’s likely to gain further momentum during the current standoff with the US, its share in the nation’s economic activity is far diminished. China has gradually been growing less reliant on Hong Kong as a source of growth as mainland cities such as Shenzhen have grown.

In 1997, Hong Kong generated 18% of China’s gross domestic product. Last year, it contributed under 3%.

When it comes world class shopping and dining few cities can compete.

© 2020 Bloomberg

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A bit off-topic, but still dealing with China’s increasing economic (and military) power & influence in that region:

The two “strategically isolated” regions of Australia & NZ comes to mind (and relevant for us since so many SA expats relocated there). Would the time come for those to re-emigrate again from Oz to other regions, as Oz (and NZ) will find themselves politically “at odds” in the SE Asia region.

With geopolitics in mind, when the day comes when the US Navy (due to budget cuts / receding economic influence) is unable to project power of “free movement” in this SE Asia region of the globe, a time will come when Oz will have to decide to “bow down” to China’s trade demands (and shun the US, it’s traditional ally for decades), as OZ and NZ’s trade shipping lanes could become CUT OFF from rest of western world (or taking the more expensive arctic shipping lanes, a huge costly detour to reach other western markets in US/UK/EU). This will place OZ & NZ at a trading cost disadvantage, unless they become part of the “One China” play & let China influence their (currently) cosy lives.

I anticipate that in the next generation many Saffas could “flee” back to SA 😉 from OZ & NZ as China’s power comes untenable in that region, with the OZ economy suffering against China’s trade influence.

And when the children of the current generation of SA expats arrive back in SA, they’ll realise the Chinese are already here 😉

I wonder, which naval force protects Mauritius for instance? (India?) Since China has started to meddle with Seychelles and “reach out” to other Sino-Indian small islands, those islands (Mauritius, Maldives, Seychelles, Sri Lanka) one day will have to choose their economic ties between India and China.

These scenarios are relevant for placing long-term retirement capital, as it has potential future complications. Will you sleep easy with most of your retirement capital invested in Australia or Mauritius (for example), while China may later have large naval presence in those countries? (i.e. they control the region and their governments). The purpose of a foreign Naval presence is to intimidate smaller, less capable nations to rather “work with” China (…the US successfully did it the past decades).

Maybe SAXO Bank (in Denmark) or a stock trading site located in Switzerland, low-debt countries, could be safer investment destination (than US, Australia) on a long-term view?
The US is at its peak global influence, some say its waning. Australia will have a difficult decision….they won’t be able to kick against China foreever….

Interesting prediction.
Think more aggression is coming between China and India.

Good point, we emigrated to Sydney ,2 years ago.
The Australia/China dynamic is an interesting one…Australia largely escaped the GRC fall out mainly due to continued investment from China.
Construction is large part of the Australian economy and in a country where there is a lot more space than people that approach has worked (well sort if)
So the informed Australian knows this and understands that all that growth came at a cost, that cost was a significate change in the demographics of Sydney and Melbourne, inflated property prices and cost of living…etc

What has changed in the last 2 years since I have been here… well there has been the a push back from conservative Australians (a number growing all the time) – they are starting the see the cost outweigh the benefits. This has led to political back and forth (as you note) and limitations on Chinese government “investment” has been put in place. But there is growing skepticism towards China here …and that’s a good thing in my opinion. The current government is trying to align themselves more with the US/UK based on what I see.
Some say a little too late.

Interestingly here the labour party (traditionally supported by the unions) seem to have more shady links to the Chinese government, just last week a few federal government members houses were raided… (seems at odds with the views of their “supposed” blue collar base…but that’s politics I suppose)

Anyway , as for my kids, I made a call that they would have a better life being raised and educated in Australia…I could be wrong but it’s a call I had to make before I turn 40….lets see how it plays out.

@LM17. Despite my geopolital predictions re China’s increasing influence in that region (to teh detriment of competing nations) let me support you in stating that your kids’s future are still way better in Oz then in SA.

For OZ, the Chinese torpedo has been launched against Ship Australia, but they still have time to counter this threat, while back in SA….the torpedo already stuck SA’s ship. SA is taking on water, starting to list, while our drunk ANC-captain and crew are still partying on this ship.

Is the author implying there’s a problem here…Maybe I’m reading it wrong..?

Doesn’t China appreciate that imperialism and colonisation are so passe”?

They are looking more like imperialist Japan from the 30’s in brutal quest of resources not forgetting subjugation of foreigners.

Best they leave the people of Hong Kong be….they surely have their hands full opressing their 1 200 000 000 citizens and their minority Muslim communities that they have banished to concentration camps for re-education and their ongoing aggression and sabre rattling on the India border.

“tightening its grip”?? … overstatement.
They just rightfully recovering a former british colonised state that does not belong to invaders in the first place.
It was peaceful.There is no reason why it should continue to be so.

South Africans are far,far,far happier in this region than in africa.

I visited Hong Kong in 95 , could not wait to get out of there.
The streets are jam packed with people and vendors, busy ,busy.
The inhabitants live in tiny apartments , reminded me of overcrowded pigeon hocks.
No wonder more than 60% of wealthy Chinese plan to retire elsewhere.

End of comments.

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