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The development of Hong Kong as an international financial centre

Over the past few decades, amid fierce regional and international competition, Hong Kong has developed into one of the leading international financial centres, having relied on our country’s solid support, benefited from its rapid development and leveraged on our own unique advantages. We have remained at the top of various international rankings, including the Global Financial Centres Index published by the Z/Yen from the United Kingdom and the China Development Institute from Shenzhen since 2007, in which Hong Kong was ranked the third globally most of the time. Yet, Hong Kong edged lower by one place to the fourth in the latest report released last month, and this has triggered extensive discussions.

Looking closely at the report’s contents, Hong Kong’s overall rating actually increased by ten points, which were more than those of New York and London, the top two centres in the ranking. However, the pandemic situation has restricted Hong Kong’s external connectivity, which might have affected the overall impression of many financial practitioners on Hong Kong and thus dragged down the relevant ratings and the overall ranking. Nevertheless, the report showed that Hong Kong still owns considerable advantages in banking, insurance, professional services and trade.

In fact, in this latest ranking, there were very keen competition and narrow gaps between cities ranked from the third to the tenth, as reflected by the fact there was only a marginal difference of one point in ratings between every two consecutive ranks. At the same time, the top two centres, New York and London, which in the past had been leading other competitors by significant margins, saw their leads narrowing in recent years as other financial centres were catching up amid intense international competition. Moreover, as the index is released twice a year, the fluctuation in ratings and rankings may be influenced by short-term factors. Therefore, it is important that we keep a clear understanding of our own strengths and weaknesses, so that we can do what is needed systems-wise, policy-wise and publicity-wise through strategic deployment and efficient implementation, so as to consolidate our strengths, shore up our shortcomings, and continuously enhance the competitiveness of Hong Kong.

If we take a comprehensive look at the objective environment and factors, we would understand that Hong Kong is indeed full of opportunities with a bright future. Compared with other international financial centres, Hong Kong’s biggest and core advantage is that we are the leading international financial centre of our country, which is the world’s second largest economy; and our super-connector role under the “One Country, Two Systems” that is difficult to replicate or replace. This is also the foundation and starting point for us to plan for the long-term development of Hong Kong. At the same time, many aspects of Hong Kong’s financial market are still outstanding and excellent, and possess obvious comparative advantages. With the more vigorous and proactive development mode adopted by the new-term Government, new development advantages and space will be created for us.

The Current Situation of Hong Kong’s Financial Markets

Many friends are concerned about how Hong Kong’s financial services industry fares as compared to Singapore, but discussions often rely on vague impressions. Statistics elaborating on Hong Kong’s financial markets’ status and development as objectively set out below should help calibrate our understanding on the current situation.

Hong Kong’s financial services markets have a significant advantage in size. In 2020, they contributed USD 76 billion to the economy or 23% of the gross domestic product (GDP), and was around 1.5 times of that of Singapore (around USD 49 billion).

According to the figures as at end of 2021, the market capitalisation of Hong Kong’s stock market was over $42 trillion, with a total of some 2 500 companies listed in Hong Kong, representing 7 times and 2.7 times more than those of Singapore respectively. The aggregate stock turnover of Hong Kong in 2021 reached a record high of HKD$41 trillion, which was over 20 times more compared to just HKD$1.9 trillion in Singapore. The convergence of capital and enterprises from both the Mainland and the globe, coupled with the advantages brought about by the mutual access with the Mainland’s financial markets, have allowed Hong Kong to develop into a capital market with greater depth and breadth and more active trading activities that has outperformed other securities market in the region.

In terms of foreign exchange, Singapore possesses relatively more inherent advantages as it serves the multi-currency Association of Southeast Asian Nations (ASEAN) region. However, being one of the major US-dollar exchange centres in the world and the largest offshore Renminbi (RMB) business centre, Hong Kong also has a strong foundation. At the end of last year, RMB deposits in Hong Kong exceeded RMB900 billion, which was about 60% of global offshore RMB deposits. About 75% of global offshore RMB payments are processed in Hong Kong.

Hong Kong is a leading bond hub in Asia, ranked third in bond issuance volume in Asia (excluding Japan) after the Mainland and Korea. With a competitive ecosystem of financial institutions and professional services, Hong Kong is also the largest centre in Asia for arranging international and Mainland offshore bond issuance, accounting for 34% of the issuance in the region, which is six times greater than that of Singapore.

In recent years, green finance has been growing by leaps and bounds in Hong Kong, both in market size and diversity. Last year, Hong Kong recorded US$31.3 billion of green and sustainable international bond issuances, accounting for one-third of the Asia market and topped the list in Asia in terms of the volume of bonds arranged; while the total amount of green and sustainable bonds and loans issued was four times of that in 2020, reaching US$56.6 billion and ranked first in Asia. The HKSAR Government has issued a cumulative total of close to US$10 billion worth of green bonds, which are denominated in Hong Kong dollar, RMB, US dollar and euro. Among them, some US dollar- and euro-denominated green bonds have a tenor of as long as 20 to 30 years, which were the longest-tenor government green bonds of the same type in Asia at the time of issuance. Among others, the Shenzhen Municipal People’s Government also issued green bonds in Hong Kong, which was the first time a Mainland municipal government issued green bonds here. The issuance has showcased the growing importance of Hong Kong’s role in channelling international capital to support the green transition of the Mainland.

Hong Kong has a leading role in the asset and wealth management industry in the region.  As at the end of last year, assets under management in Hong Kong amounted to over US$4.5 trillion, with two-thirds of the funding sourced from non-Hong Kong investors.  Hong Kong is also Asia’s largest hedge fund centre and the second largest private equity market in Asia (only after the Mainland).  The capital under management by private equity industry has recorded US$180 billion, four times higher than that of Singapore.  Furthermore, the total assets of Hong Kong’s banking industry amounted to over HK$26 trillion last year, setting a record high in many years.

These figures allow us not only to discuss how we could shore up our shortcomings, but also to identify our strengths objectively. Hong Kong has always grown and developed in the midst of competition. There is no need to underestimate ourselves or hide from our weaknesses. What we need to do is to face the reality, and make targeted, effective policies to further enhance the competitiveness of Hong Kong’s financial market.

Hong Kong is not just an international financial centre; we are our country’s international financial centre. We, with our first mover advantages, have “quantitative and qualitative” edges of a developed market; enormous opportunities are seen down the road. However, at the same time, profound changes in the world unseen in a century are rapidly unfolding and will bring challenges.

Challenges

1. Increased risk of global recession. Major central banks of overseas economies have raised interest rates rapidly to curb inflation, and this has led to rising costs of business operation and borrowing, thus dampening investment and consumer sentiment. Alongside with growing geopolitical tensions, the adding up of negative factors could push the global economy into recession again. The International Monetary Fund has already warned that it would lower the global growth forecast for 2023 again from the previous projection of 2.9% in its new report to be released next week. The World Bank has also indicated earlier that the global growth could be as low as 0.5% next year, reflecting the deteriorating economic outlook. On the other hand, the declining risk appetite and interest rate differentials could lead to sharp turns in capital flow directions at any moment, and they could possibly trigger a new round of volatility in the global financial markets.
2. Increasingly fierce market competition. As the global economy is facing headwinds, competition among companies and markets will inevitably become more intense and acute. Different economies may scramble harder for businesses and talents in order to maintain the momentum of their economic and sectoral development.
3. Uncertainties brought about by de-globalisation. In the past, globalisation drove the integration of markets around the world; but the rise of populism, protectionism and geopolitical tensions are reversing it. Two camps of system are gradually emerging. Hong Kong, as our country’s international financial centre, is also faced with new ideological challenges. We must get fully prepared for them.

Opportunities

1. Firm support from our country. The medium-to-long term trend of rising economic prospects of our country has remain unchanged. Since its reform and opening up, our country’s economy has been growing at an average annual rate of over 9%, and is now the world’s second largest economy, accounting for over 18% of the global economy. The stable and prosperous development of our country provides the strongest backing of Hong Kong’s future development.
2. Developing Asia. With the global economic gravity shifting from the West to the East, Asia’s share of the world economy has already exceeded 40%. It is expected that the region’s economy will continue to grow at a faster pace and its share in the world economy rise further in the future. The share of 30 emerging and developing Asian countries of the world economy has also jumped from 17% in 2012 to 26% this year. For the 10 countries of ASEAN, their economies have grown rapidly over the past years. Together they are now the world’s fifth largest economy; and anticipated to be the fourth largest by 2030. One can imagine that in the future, Asia will play an even more prominent role in the global economy. Hong Kong, with its close ties to countries in the region, is standing on the favourable side of history.
3. Institutional advantages of “One Country, Two Systems”. “One Country, Two Systems” is an institutional strength of our country’s governance system, and gives Hong Kong a distinctive status and a host of advantages. Within “One Country”, Hong Kong enjoys the firm support from our country and benefits from participating directly and fully in the development of the vast Mainland market. The advantages of “Two Systems” allow Hong Kong to continue to practise the capitalist system, retain its common law system and judicial independence, maintain a high degree of freedom and openness as well as an internationally-aligned business environment, making Hong Kong a unique bridge for our country to connect with the world. The Basic Law protects the free flow of capital into and out of Hong Kong, as well as the legal status of the Hong Kong dollar. The transparent, stable and efficient Linked Exchange Rate System is the backbone of Hong Kong’s monetary and financial stability. These advantages have continued to deliver enormous benefits for Hong Kong’s economic development. Take innovation and technology for example: “One Country, Two Systems” has enabled us to work more closely with our sister cities in the Guangdong-Hong Kong-Macao Greater Bay Area, allowing cities to complement each other’s strengths. Hong Kong’s scientific research and development (R&D) is set to go faster and further as we join with the Mainland’s strong R&D capabilities, advanced manufacturing industries and market forces.

While Hong Kong will face both opportunities and challenges in the future, opportunities outnumber challenges. I announced the organisation of the Global Financial Leaders’ Investment Summit in the Budget in February this year when Hong Kong was experiencing the peak of the fifth wave of the COVID pandemic. And yet responses from overseas were overwhelmingly positive. In the process of organising the Summit, different international financial institutions approached us and sought to attend the event even though they had not yet received invitation. Indeed, the Summit will be the first high-profile financial conference to be held physically in Hong Kong since the outbreak of the pandemic three years ago. With over 100 leading institutions from around the world, this is surely one of the most anticipated financial events in Asia this year.

With the Summit to be held in less than a month, preparations are in full swing. Many participants have indicated that a one-day event is too short, and many who are not able to attend would like to have the opportunity to join. In response, the Hong Kong Monetary Authority, together with the Hong Kong Academy of Finance, will organise a seminar titled “Global Investment Dialogue” with “Investing through Uncertain Times” as its theme on the day following the Summit (3 November 2022). The seminar will feature, among others, distinguished speakers from a range of global asset managers including traditional long-only funds, established private equity funds, infrastructure finance experts and large hedge funds. They will share how to rise to the challenges and grasp opportunities under the currently uncertain macro environment. Their experience and unique perspectives will provide participants with a comprehensive and multi-faceted overview of the current investment landscape. In addition to inviting Academy members and guests to attend the seminar, the event will also be broadcast live so that more members from the financial industry and the public can participate.

Since assuming office, the new-term Government has adopted a science- and evidence-based, targeted ant-epidemic approach, with the aim of maximising the resumption of economic activities and external connections at a minimum cost. We strive to lead Hong Kong steadily out of the adversities of the pandemic. With the easing of the COVID situation, anti-epidemic measures have been adjusted accordingly; the relaxation of quarantine arrangements for arrivals to “0+3” is an important step to this end, which has greatly reduced the inconvenience of cross-boundary travel while keeping risks under control. It is conducive to restoring the confidence of the international community in Hong Kong as an international financial centre that is open with an efficient flow of capital and people. We are also gradually resuming visits to overseas, and eagerly seek to tell the good stories of Hong Kong by promoting our development opportunities and potential. Hong Kong is an international financial, shipping and trading centre. For many entrepreneurs and business executives, Hong Kong is a market full of opportunities, a city filled with vibrancy, and a food paradise with cuisines from all over the world. Together with Hong Kong’s cultural hub status – signified by the Hong Kong Palace Museum, the M+ Museum, the Xiqu Centre and more – and the beauty of our natural environment and scenic country parks, etc., they make city life here so dynamic, entertaining and culturally rich. As we gradually return to normality, Hong Kong’s boundless opportunities, vibrancy and colourful lifestyle will continue to attract the world’s top talents from the financial and other fields, as well as enterprises from around the world, to embrace the many opportunities we have to offer.

October 9, 2022