Richard Grasby, Founder of RDG Fiduciary Services, explores the future of Hong Kong as an international financial centre following developments surrounding the recently implemented national security law in the jurisdiction.
“It is always wise to look ahead, but difficult to look farther than you can see.”[i]
Hong Kong has been undergoing changes in recent years - that cannot be denied. But to suggest – as many have[ii] – that it is finished as an international financial centre (IFC), is both misguided and premature. Certainly, much of the evidence would suggest otherwise.
Hong Kong’s focus and role will undoubtedly change, as will the types of business being undertaken. Certainly, Hong Kong’s relationship with the rest of the People’s Republic of China (PRC) will be ever more important. Since Mainland China’s economy will dominate globally in the very near future, if not already, being the immediate neighbour to the world’s soon-to-be largest economy will still make Hong Kong an attractive IFC. Note for example, the “Wealth Management Connect”[iii] is designed, inter alia “to strengthen Hong Kong’s status as an international financial centre and offshore RMB hub”.
How Hong Kong will be governed and how that will be interpreted by the global market is open to debate[iv]. Furthermore, as 2047 becomes closer, additional review and clarification will be needed. At present, it is without question that Hong Kong still has its own system.
It should be noted that Hong Kong has been evolving over the past 200 years and will continue so to do[v]. Hong Kong was part of the Great Qing until 1842, at which time the British took[vi] Hong Kong Island followed by much of the southern part of Kowloon[vii]. In 1898, further territory (aka the “New Territories”) was acquired by Britain but this time by a 99-year lease from the Qing authorities. By virtue of this expiring period, further evolution was inevitable.[viii]
Since the British in practice did not distinguish between the leasehold territory and the remainder, this “removed any doubt that when 30 June 1997 arrived, the issue of Hong Kong would have to be dealt with as a whole”.[ix]
In addition, it is also worth noting that China itself has undergone radical change during this same 200-year period. The Great Qing – who had dealt with the British – ended in 1912. The Republic of China existed[x] between 1912-1949 before the People’s Republic of China was created. The PRC itself can be regarded as having several distinct phases. Today’s PRC has four cities in the Global Financial Centres Index Top 10[xi] and is fast becoming the world’s largest economy.
In the early 1980s, triggered in part by the impending expiry of leases in the New Territories and also because of the openness of the then PRC leadership,[xii] negotiations began between Britain and the PRC, resulting in the Sino-British Joint Declaration in 1984[xiii] and the drafting of the Basic Law[xiv] to take effect from 1 July 1997. This was the “one country, two systems” formula[xv].
Compared to other autonomous regions across the world, Hong Kong retained, and still retains, a great deal of independence; its own currency, tax system, judiciary and legislature, by way of examples. Provisions of fundamental human rights are entrenched into the constitution.[xvi] Hong Kong’s common law system is unique in the surrounding region and an essential component of using Hong Kong as a gateway to Mainland China and other regional centres.
It also has never been debated that Hong Kong is part of the PRC – Article 2 of the Basic Law states that Hong Kong is “an inalienable part of the [PRC]”. However, it is true to say that there have been tensions over several parts of the Basic Law and the relationship with the Mainland. In particular, the extent of universal suffrage, Mainland presence[xvii] in Hong Kong, “oath taking[xviii]” and the unfulfilled commitment given by Hong Kong pursuant to Article 23 of the Basic Law[xix]. Attempts had been made to introduce such legislation, notably in 2003 and later in 2019 which led to major unrest[xx]. 2014 also saw disruption in relation to the means of selection of the Chief Executive but this was generally peaceful.
The escalation of violence in 2019 did not assist Hong Kong’s standing as a stable international financial centre. Thus in 2020, the Standing Committee of the National People’s Congress caused the enactment of the National Security Law (NSL) into Hong Kong. The method of implementation of the NSL and its potential scope has attracted much discussion[xxi] but only time will tell. Certainly, there is an acceptance that there has been a change, but not a fatal one[xxii].
An article in the Hong Kong Lawyer from the Managing Partner of a leading Hong Kong law firm states[xxiii]: “Needless to say, it is the future implementation of the NSL… that will determine whether it is overly draconian and breaches the principle of ‘One Country, Two Systems’; or whether the implementation of the NSL can be enforced within the Rule of Law, despite its wide ranging provisions.” See more recently the public statement from the Law Society of Hong Kong.[xxiv]
The United States – already with a multitude of other disagreements with the PRC – implemented laws which could impact Hong Kong but again only time (and the US election results) will tell[xxv]. To quote from The Economist[xxvi]: “That Hong Kong has become so important to global finance that people are terrified by the prospect of its being damaged is a backhanded compliment—and a reminder of how hard it is to absorb the jolts and shocks from two superpowers moving apart”.
But does Hong Kong still have a future as an IFC? Despite much of the data preceding the NSL (but not the 2019 protests) the data would suggest so.
The September 2020 edition of the Global Financial Centres Index[xxvii] shows Hong Kong rising from 6th to 5th from the March 2020 edition. It should be noted that Hong Kong did fall from 3rd to 6th from the September 2019 survey.
The “Democracy Index” published by the Economist Intelligence Unit each year[xxviii] classifies Hong Kong and China separately. Hong Kong does not rank particularly highly on open democracy[xxix] but comparison with two rivals is worth noting. In the 2019 Issue Hong Kong was ranked 75th equal (with Singapore) – a fall of 3 places – but still 70 places above the UAE and 78 places above China.
The 2020 Index of Economic Freedom[xxx] ranks Hong Kong in second place (behind Singapore) – reversing the positions from 2019 – and classifies Hong Kong as having “minimal government interference”.
Hong Kong remains a crucial centre for Initial Public Offerings (IPOs) and was the world leader in 2019[xxxi]. As far as 2020 is concerned, numbers have been affected by COVID-19 but Hong Kong ranks third[xxxii]. However, with Ant Group (expected to be the biggest ever IPO – once approval is obtained) choosing a dual listing in Shanghai and Hong Kong, numbers are expected to increase in the remainder of 2020[xxxiii] and into 2021.
Companies listed on Hong Kong’s exchange have an aggregate market capitalisation greater than any exchange in Europe.
The Hong Kong Monetary Authority has announced that banking deposits have increased and due to inflows of capital into Hong Kong, it has had to intervene many times in recent weeks to maintain the currency peg with the USD[xxxiv].
It may be true that institutional capital may not be so concerned by changes happening on the ground in Hong Kong but what about private wealth? Hong Kong has been visible in terms of promoting itself as a family office[xxxv] and trust centre[xxxvi] but this is more to gain market share rather than retain existing market share. Hong Kong has always been more of an asset base rather than a structure base for private wealth. Hong Kong is also actively focusing on Asia’s investment funds business[xxxvii].
There were reports of funds fleeing from Hong Kong to places such as Singapore. Is there any evidence to suggest this? In June 2020, the Monetary Authority of Singapore[xxxviii] stated that media reports suggesting that there were large flows of deposits from Hong Kong to Singapore were incorrect.
The Hong Kong Monetary Authority report[xxxix] as at September 2020 states: “no significant outflows from the Hong Kong dollar or the Hong Kong banking system were observed during the review period” and “Moreover, with total deposits growing in the first seven months of 2020, there were no significant cross-border outflows from the Hong Kong banking system.”
The Boston Consulting Group Global Wealth 2020 Report – published in June 2020[xl]- states that Hong Kong is catching up to Switzerland as a global booking centre. However, the Report did contain the qualification that: “While the protests in Hong Kong that began in 2019 have had no significant effect on cross-border assets so far, ongoing turbulence could encourage wealth flows to shift toward Singapore and other cross-border centers”.
The Hong Kong Private Wealth Management Report 2020[xli] states that “Hong Kong has remained resilient in the face of unprecedented challenges” and that “Mainland China remains the core growth driver”.
Wealthy private clients have tended to allocate their wealth in several centres and movement of funds can be driven by matters such as tax changes, currency shifts, market opportunities and deployment of capital. Where the wealthy private clients are located is a separate question[xlii]. Wealthy clients have increasingly been looking for options – a Plan B or even Plan C – in terms of residence and / or citizenship options for one or more family members. Many Hong Kong citizens have passports from other jurisdictions and have invested in property abroad. Many people left Hong Kong before the handover in 1997 but a large number returned. With the current pandemic, it is hard to be certain as to future emigration trends but that should not affect Hong Kong’s standing as an IFC.
Thus the 2020 version of Hong Kong remains a very important IFC with a vibrant future which should be supported by the global industry.
[i] Winston Churchill
[ii] See for example FT 2 July 2020 “The End of one country, two systems in Hong Kong” https://www.ft.com/content/5d3d7d2e-bba8-11ea-a05d-efc604854c3f
[iii] See for example The Launch of the Cross-boundary Wealth Management Connect Scheme in the Greater Bay Area https://assets.kpmg/content/dam/kpmg/cn/pdf/en/2020/07/cross-boundary-wealth-management-connect-scheme.pdf
[v] See for example piece by R Harris https://www.scmp.com/comment/opinion/article/3101892/hong-kong-will-remain-great-financial-centre-only-colour-money-will
[vi] In perpetuity.
[vii] In 1860. For those who know Kowloon – up to “Boundary Street”.
[viii] It seems that the distinction was not readily noticeable at the time. See for example D Gittings – Introduction to the Hong Kong Basic Law
[ix] See D Gittings – Introduction to the Hong Kong Basic Law at p11.
[x] As it related to the mainland.
[xi] Shanghai, Hong Kong, Beijing and Shenzhen. See https://www.longfinance.net/media/documents/GFCI_28_Full_Report_2020.09.25_v1.1.pdf
[xii] Deng Xiaoping.
[xiii] Signed in 1984; effective 1985.
[xiv] The Basic Law of the Hong Kong Special Administrative Region of the People's Republic of China. Approved in 1990.
[xv] Interestingly, Article 109 of the Basic Law states that HKSAR Government “shall provide an appropriate economic and legal environment for the maintenance of the status of Hong Kong as an international finance centre.”
[xvi] The Bill of Rights Ordinance.
[xvii] For example, the status of PRC government offices in Hong Kong and Mainland customs and immigration at the West Kowloon station.
[xviii] In respect of qualification requirements for members of the Legislative Council.
[xix] To enact laws on its own to prohibit any act of treason, secession, sedition etc
[xx] The attempt to implement the Fugitive Offenders and Mutual Legal Assistance in Criminal Matters Legislation (Amendment) Bill 2019
[xxi] https://edition.cnn.com/2020/07/01/asia/hong-kong-national-security-law-intl-hnk/index.html by way of example. And https://www.scmp.com/news/hong-kong/politics/article/3086289/tycoon-li-ka-shing-throws-weight-behind-hong-kong-national for another.
[xxii] At the time of writing, a further dispute in relation to the disqualification of certain members of the Legislative Council was occurring.
[xxiii] http://www.hk-lawyer.org/content/overview-hong-kong%E2%80%99s-national-security-law per Andrew Powner, Haldanes.
[xxv] A law applying sanctions against banks which do business with Chinese officials and various import restrictions.
[xxvi] Per footnote 3
[xxix] But never has.
[xxxii] Per the EY Global IPO Report Q2 2020.
[xli] Prepared by KPMG and the Private Wealth Management Association. See https://www.pwma.org.hk/wp-content/uploads/2020/11/HK-PWM-Report-2020_Final_English.pdf
[xlii] See the author’s article at https://www.ifcreview.com/articles/2020/july/family-office-hong-kong-or-singapore-or/
Richard has worked as a lawyer in Jersey, UK, Cayman Islands and Hong Kong, and is a leading offshore private wealth adviser in Asia. He specialises in private wealth, succession planning, trusts, family office, offshore structuring, economic substance, governance and related matters. Member of STEP global steering committees for Business Families and International Client. Member of STEP Hong Kong Branch Executive Committee. Member of the International Academy of Estate and Trust Law.