How China can further inland Hong Kong finance

At a recent financial summit, Chinese Vice Premier He Lifeng emphasized the central government’s support for Hong Kong as an international financial center. However, as Western financial institutions and international law firms begin to relocate their business to other regions, Hongkongers emigrate, and Mainland residents move in, Hong Kong increasingly resembles a Mainland Chinese city, losing its international luster.

Chinese Officials Assert Beijing Will Strengthen Hong Kong’s Status as a Financial Center

The 3rd International Financial Leaders Investment Summit was recently held in Hong Kong. He Lifeng, a member of the CCP Central Committee and Vice Premier of the State Council, delivered a speech at the opening, guaranteeing support and guiding the direction for Hong Kong's development as an international financial center. He Lifeng affirmed Hong Kong’s role in China’s dual-circulation economic development. In his speech, He emphasized Hong Kong’s outward-facing, international character, its strategic pivot role, and its importance in leveraging the development of the Guangdong-Hong Kong-Macao Greater Bay Area. This is a key competitive advantage for Hong Kong, crucial for its global connectivity, attracting investment, and expanding international financial cooperation.

He Lifeng also praised Hong Kong’s role as a bridgehead in the offshore renminbi market. He mentioned that the state would steadily increase the scale of government bonds issued in Hong Kong, support more high-quality enterprises to list in Hong Kong and issue bonds, and continually optimize and expand connectivity between Mainland China and Hong Kong in areas such as stocks, bonds, wealth management, and interest rate swaps. These arrangements would significantly benefit the development of Hong Kong as an international financial center.

Li Yunze, head of the National Financial Regulatory Administration, noted at the conference that 73 of the world's top 100 banks have a presence in Hong Kong, and 7 of the top 10 insurance companies operate there. Mainland Chinese banks and insurance institutions in Hong Kong account for half of all Chinese overseas assets, and Mainland Hong Kong-based banks make up nearly half of foreign banks in China.

Li added that, as the world’s largest offshore renminbi hub, around 80% of global offshore renminbi transactions are settled through Hong Kong. Over 70% of international investors' investments in China’s securities market are channeled through Hong Kong, and 80% of Mainland enterprises’ overseas listings and fundraising are completed there.

Li emphasized the Regulatory Administration's firm support for Hong Kong in consolidating and enhancing its status as an international financial center. The recent Closer Economic Partnership Arrangement (CEPA) between Mainland China and Hong Kong introduced several new financial liberalization measures, including removing the $2 billion total spending requirement for Hong Kong and Macau financial institutions to invest in Mainland insurance companies, and allowing Hong Kong and Macau banks’ Mainland branches to engage in bank card business. Moving forward, the Administration will strongly support Hong Kong’s unique status and advantages under "One Country, Two Systems," ensuring long-term financial stability and development while integrating into the national development plan.

Is Hong Kong’s Financial Center Becoming "Mainlandized"?

Hong Kong, as an international financial center, has traditionally used bilingual English and Chinese at its Stock Exchange. Recently, however, Chinese has gradually started to surpass English in some contexts, becoming the primary official language. The Iron Fairies, a well-known bar near the Hong Kong Stock Exchange that used to cater mainly to Western bankers, now mainly serves Mainland Chinese customers.

The Wall Street Journal recently reported that Beijing's takeover of Hong Kong's financial industry seems irreversible. With international financial institutions, companies, and expatriates leaving, Hong Kong, once a top-tier global investment center bridging East and West, is becoming more "Mainlandized."

The report stated that two years ago, half of Hong Kong's IPO deals were led by foreign banks, but this year, the proportion has dropped to one-fifth. In Hong Kong’s debt capital market, Chinese banks have replaced Western banks as the top earners.

According to the report, private bankers are increasingly serving China's newly wealthy, rather than the expatriate elites who built their fortunes over past decades. Corporate recruiters say that Mandarin proficiency is now crucial for finding work in Hong Kong.

Investment banks such as Goldman Sachs, Morgan Stanley, and UBS, which used to earn substantial commissions in Hong Kong, have seen a sharp decline in such revenues, prompting rounds of layoffs in their Asian offices. Meanwhile, some of the world’s largest international law firms have followed suit, cutting staff due to difficulty competing with lower-cost Chinese firms.

In the long term, Western financial institutions have begun to devise new China strategies. Many have shifted focus from investment banking to wealth management, while others are redirecting resources to India and the Middle East.

The Wall Street Journal reported that many Western bankers and investors privately lament the changes in Hong Kong's business and cultural landscape, believing this could reduce Hong Kong’s diversity, transparency, and scrutiny of high-risk financial behavior.

The report added that Chinese banks often prefer investing in Mainland China’s overdeveloped real estate sector or funding indebted local government financing platforms, some of which now face default risks. In response, many Chinese banks have started tightening their standards.

However, Chinese executives have a different view, expressing a preference for Chinese banks despite their smaller scale abroad. They argue that Chinese banks provide better service, charge lower fees, and have a broader network in Mainland China. For Chinese companies seeking to issue stocks or bonds outside Mainland China, Hong Kong remains essential, but they no longer need Western bankers as gatekeepers.

In response to concerns that Hong Kong is becoming less international and more like a Mainland Chinese city due to the influx of Chinese companies, a Hong Kong government spokesperson recently stated that this was entirely untrue.

The spokesperson emphasized that Hong Kong remains an international financial center, pointing to the Global Financial Centers Index released in September, where Hong Kong was again ranked among the top three global financial centers alongside New York and London.

Official data shows that in 2022, for the first time, the number of Mainland Chinese companies with regional headquarters in Hong Kong exceeded that of American companies. Last year, the gap widened further.

The dominance of Mainland Chinese companies in the Hong Kong stock market has also solidified. As of the end of October, Mainland enterprises accounted for 80% of the total market capitalization of Hong Kong’s stock market, up from 60% a decade ago.

Brady Dougan, former Chairman of Credit Suisse's Asia-Pacific Investment Banking, remarked that Hong Kong has shifted from a pan-Asian investment banking hub to a Chinese investment banking hub. Today, Hong Kong’s market is effectively a Chinese market.

Hong Kong Luxury Homes Being Sold Off, Hongkongers Leaving in Droves

Over the past two decades, property prices in Hong Kong have soared, making it one of the world's least affordable cities. The poor live in cramped subdivided flats, so small they are known as "coffin homes."

The New York Times reported that now, from developers to wealthy speculators, many are being forced to sell their valuable properties. With China’s real estate market booming, these individuals saw their wealth swell rapidly, but now, the collapse of the real estate sector has left many short of cash.

The most notable case is that of Hui Ka Yan, founder of Chinese real estate giant Evergrande. After Evergrande’s collapse, creditors seized several of his European-style mansions valued at over $190 million, one of which sold this year for $58 million, less than half its original purchase price. Earlier this year, a Hong Kong court issued a winding-up order against Evergrande, prompting foreign investors owed by Evergrande to search for any assets Hui could sell.

According to the Hurun China Rich List, Chinese billionaires have suffered significant losses, with 432 individuals losing their billionaire status in the past three years.

The report states that Hong Kong is now striving to reclaim its title as an international financial center, as the damage from strict COVID-19 policies has not been fully repaired. Additionally, political changes in Hong Kong have heightened the legal risks for Western companies.

Hong Kong experienced a mass exodus after the 2019 "Anti-Extradition Bill" protests and the implementation of the National Security Law in 2020. At the same time, Mainland Chinese have moved to Hong Kong through various channels. There are concerns that these new residents may impact Hong Kong’s unique local values and culture, potentially shaping the future of Hong Kong society.