Hong Kong, once a thriving hub for finance, is experiencing a decline as a global financial center due to its closer ties with China’s political landscape. The changing dynamics have prompted Western expats to leave in large numbers, according to Andrew Collier, managing director of Hong Kong-based Orient Capital Research.
The erosion of the One Country, Two Systems doctrine by Beijing has had far-reaching consequences beyond Hong Kong’s borders. It played a significant role in Taiwan’s recent election, which saw a China-hawkish party win for the third consecutive time. Moreover, Hong Kong’s status as Asia’s premier banking and investment hub has been disrupted.
The business landscape, particularly for enterprises not exclusively focused on China, has shifted to Singapore. In fact, Singapore has overtaken Hong Kong in the Global Financial Centres Index compiled by consultant Z/Yen. This development has attracted attention, with private-equity giant Blackstone announcing a doubling of its headcount in Singapore just last week.
According to Z/Yen CEO Mike Wardle, Singapore’s success can be attributed to its proactive efforts in attracting growth areas like wealth management and fintech. In comparison, Hong Kong seems to lack the same level of adaptability in this changing environment.
Hong Kong’s finance sector has faced a triple blow. First, in 2020, China imposed a new National Security Law that curtailed free speech protections and competitive elections. Then, due to stringent “zero Covid” policies in 2022 and 2023, the territory faced prolonged shutdowns while its competitors, including Singapore, experienced a swift recovery. Finally, the implosion of Chinese stock and bond markets severely impacted underwriting and dealmaking activities. In fact, Hong Kong’s initial-public-offering volume in 2023 plummeted to its lowest level in two decades at $5.9 billion.
The decline in the financial services sector has resulted in a notable decrease in employment, estimated to be between 10% and 15% from its peak in 2018. Additionally, the Western presence in Hong Kong has diminished by up to 30%, as estimated by John Mullally, Hong Kong managing director for recruiter Robert Walters.
Hong Kong’s Economic Prospects Amid Political Challenges
The current situation in Hong Kong poses significant challenges, but it is important to note that the city’s economic decline is largely attributed to the impact of Covid-19 rather than China’s hard-line political shift. According to Z/Yen’s Wardle, there is a possibility that Hong Kong may regain its position ahead of Singapore in the future.
However, the ongoing show trial of dissident publisher Jimmy Lai, who is charged with “conspiracy to collude with foreign forces,” presents a hurdle to Hong Kong’s revival. In an effort to improve their economic standing, Hong Kong’s economic officials have embarked on a charm offensive. Finance chief Paul Chan even toured the U.S. and Europe, assuring that the “One Country, Two Systems” principle is still intact.
Despite these efforts, consultant Collier suggests that investors remain unconvinced due to Hong Kong’s failure to address fundamental legal challenges. The welcome mat may seem appealing on the surface, but it lacks substance.
Nevertheless, one advantage for Hong Kong is its status as China’s primary U.S. dollar bank, which could prove lucrative if markets in China experience an upswing. The collaboration between the two jurisdictions has led to the expansion of their “stock connect” trading regime, with plans to enable block trades in the future. Additionally, a short bullet-train ride connects Hong Kong with Shenzhen, the financial hub of mainland China.
If China’s market shifts back to a bull market, Hong Kong will need to quickly adapt. Job opportunities in Hong Kong now predominantly require fluency in Mandarin, excluding many expats who were once attracted to the city. Mullally points out that qualified Chinese individuals may find more favorable opportunities on the mainland, while Western-educated individuals often prefer to stay in their home countries.
The headhunter concludes that if market conditions improve, there may be a talent shortage in Hong Kong. However, this remains uncertain.