LONDON (Reuters Breakingviews) - Hong Kong is conducting a real-time experiment: What are the minimum conditions for a functioning financial centre? Months of increasingly violent clashes between protesters and police have challenged some of the strengths that make it Asia’s foremost international hub.
Banking and trading nerve centres need easy movement of money and people, free flows of information, stable laws and peace. Hong Kong has long had all of these, enshrined in the 50-year agreement under which Britain handed the territory to China in 1997. It also offers low tax rates. Yet less than halfway through the transition, its status is in serious doubt.
Calm was the first casualty of demonstrations sparked by a controversial extradition bill introduced by Chief Executive Carrie Lam. In scenes that shocked a city where violence is rare, protesters trashed shops and started fires as police fired tear gas, water cannon and even live bullets. The battle culminated in a medieval siege at Hong Kong’s Polytechnic University, where activists armed with petrol bombs and a makeshift catapult confronted police who had sealed off exit routes. Travellers using the airport, subway and harbour tunnels have all faced disruption.
The independent legal system, a legacy of British rule, is also under strain. The now-withdrawn legislation raised the spectre of suspects being whisked across the border and into China’s opaque courts. Hong Kong judges face meddling from Beijing. When the territory’s Supreme Court last month threw out a proposed government ban on face masks, China’s top legislature declared the justices had no power to rule whether the proposal was constitutional.
These infringements have made Hongkongers question their other freedoms. Though fund managers can still move money around the world from gleaming high-rise towers on the harbour, they talk about establishing backup offices in Singapore or Sydney. Bankers report a surge in wealthy clients opening accounts elsewhere. Expats compare emergency evacuation plans in case China cracks down. And though information remains freely accessible, locals are keenly aware how easily the digital “great firewall” could be extended from the mainland.
Yet Hong Kong’s financial apparatus keeps humming along. As office workers in the financial district fled tear gas during their lunch hour, Alibaba last month raised almost $13 billion in a secondary listing on the Hong Kong exchange. Retail investors placed orders worth 40 times the amount they had been allocated, Reuters reported.
The e-commerce giant’s listing underscores Hong Kong’s appeal. The $520 billion New York-listed company has long faced pressure to give Chinese investors access to its shares. Growing economic tensions with the United States provide further impetus for an alternative trading venue. But an offering on the Shanghai or Shenzhen exchanges would have been highly complicated for a company incorporated in the Cayman Islands. That made Hong Kong the only credible alternative.
The city ranks fourth as a financial centre when it comes to attracting cross-border funds or international bank assets, far ahead of Asian rivals, according to a 2018 study by New Financial, a think tank. While the mainland bourses serve China’s vast domestic market, they remain largely walled off for international capital. For that to change, China will have to relax tight controls on financial flows and develop a legal regime that foreign buyers can trust. That would take decades.
These relative advantages may help insulate Hong Kong from more severe suppression. Both expat and local executives and financiers hope the overwhelming support for pro-democracy parties in district council elections last month will prompt the government to back down. Concessions could include an official inquiry into the recent violence and the reintroduction of limited proposals for broader democratic votes. Another idea is for Beijing to extend the 50-year handover period far beyond 2047.
Local tycoons are also belatedly recognising that rampant inequality, as evidenced by sky-high property prices, is partly to blame for the turmoil. A construction push could help boost home ownership, which has fallen below 50% of the population. In Singapore, the figure is above 90%.
Economic sops, however, may be insufficient to calm younger generations for whom the protests are an expression of an identity distinct from the rest of China. If violence persists, the People’s Republic may decide that squashing a challenge to its authority is more important than preserving a financial hub. Companies that don’t need access to China could relocate their regional headquarters. Bankers serving Chinese clients could be stationed on the mainland.
There is a chance Hong Kong goes the way of Antwerp, Venice or Beirut: once-mighty financial hubs which succumbed to adverse economic and political shifts. So long as mainland China’s alternative centres tick fewer boxes, though, the city will retain its relative appeal.
Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.
Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.