China Still Needs Hong Kong

The Alibaba listing shows how critical the city is for the financial future.

After another massive march on the weekend, Hong Kong’s protests have passed the six-month mark. Since
they started, the protests have taken a toll on the economy and the city has fallen into its first recession in 10
years. Hong Kong is expected to run a budget deficit for 2019, the first since 2004. Increasing violence and a
growing sense of unease are leading to predictions that Hong Kong is finished as a business hub and that it has
outlived its usefulness for China.

Nothing could be further from the truth.

If the protests continue to grow and cause more unrest, this will certainly affect Hong Kong’s business hub
status as multinationals might move their operations and capital elsewhere to places like Singapore. But while
Beijing wants to diminish Hong Kong’s political rights and autonomy, it also wants to exploit its status as a
global financial center – and it doesn’t have any easy options to replace it, as two recent events show.

In mid-November, Chinese logistics giant Alibaba launched its secondary market offering in Hong Kong, raising
more than $11 billion, making it the biggest public offering globally in 2019. Then, at the end of November,
U.S. President Donald Trump signed the Hong Kong Human Rights and Democracy Act. The law requires the
United States to conduct an annual review of Hong Kong’s autonomy, with the ability to revoke economic
privileges that treat Hong Kong as a separate economic entity and exempt it from sanctions and tariffs
imposed on China. Beijing lashed out angrily at the United States, threatening dire consequences. It’s not
surprising—because if the United States ever suspended its economic privileges for Hong Kong, this would not
only be a massive blow to Hong Kong, but also severely damaging to China.

True to form, at the start of December, China banned U.S. naval ships and military aircraft from visiting Hong
Kong and sanctioned U.S. nongovernmental organizations such as Human Rights Watch. Then, on the
weekend, the chairman and president of the American Chamber of Commerce in Hong Kong were detained for
two hours and denied entry to Macao.

One of the most common statistics thrown about regarding Hong Kong’s loss of significance is that its gross
domestic product is only equivalent to 3 percent of China’s, down from more than 20 years ago when it was
18 percent. But given Hong Kong’s population of 7 million is less than 0.5 percent of China’s population of
more than 1.4 billion, Hong Kong is clearly still punching far above its weight.

More importantly, Hong Kong’s worth has never been about the size of its GDP, but its functions as a business
hub. Hong Kong facilitates the majority of investments and other financial transactions between China and the
world. Hong Kong is also a major stock market for top Chinese firms such as Alibaba to launch IPOs, and it is
the world’s top non-mainland yuan clearing center. In short, Hong Kong is China’s top international business
hub. If Shanghai was capable of taking over Hong Kong’s role, it would have done so years ago.

Alibaba’s secondary market offering (its IPO was in New York in 2014) was hailed as a vote of confidence for
Hong Kong. But Alibaba wasn’t just doing Hong Kong a favor; it was using the city in the same way that more
than 1,100 mainland Chinese companies, including Tencent, Xiaomi, Haier, and state-owned enterprises have.
As a result, Chinese firms account for half of all entities on the Stock Exchange of Hong Kong and represent
more than two-thirds of capitalization and 79 percent of turnover. As a result, Chinese firms account for half
of all entities on the Stock Exchange of Hong Kong and represent more than two-thirds of capitalization and 79
percent of turnover. As one of the world’s major international stock exchanges, Hong Kong has a wide pool of
international investors, which mainland stock markets in Shanghai and Shenzhen lack. Hong Kong’s more
established financial infrastructure and clearer regulations make getting listed a smoother and clearer process
than on the mainland.

Hong Kong is also by far the biggest offshore clearing hub for the renminbi, accounting for more than 70
percent of deals. This is despite a growing number of cities, including London, Toronto, and Zurich, that also
act as offshore renminbi hubs.

Meanwhile, almost two-thirds of direct investment into and out of China originate or are transacted through
Hong Kong. Again, clear regulations and lack of capital controls mean it is much easier for investors to channel
funds to or from the mainland through Hong Kong rather than directly. Simply put, Hong Kong is an
indispensable gateway for foreign funds to China.