A tale of two Hong Kongs: Beijing cracks down while the financial hub thrives

It is a tale of two Hong Kongs. Twelve pro-democracy activists were last week captured by China’s coast guard as they attempted a dramatic speedboat escape to Taiwan. They were seeking to evade punishment under the tough national security law that Beijing imposed on the territory in June but now languish in detention in the mainland — the youngest reportedly just 16.

Two days before the thwarted escape was revealed, Ant Group announced plans in Hong Kong to launch what may become the biggest share offering in history. The mainland Chinese technology company could generate a $300m payday for investment bankers who underwrite the issue and has investors buzzing with excitement over the future of Asia’s leading financial centre. 

The huge initial public offering has become a focal point for those who hope that capitalism can continue to boom even as civil liberties are eroded. In this interpretation, the new security law is seen not as marking a dead end for Hong Kong but rather a fork in its road to the future, counteracting the gloom expressed in recent business surveys.

“The destruction of political rights in Hong Kong does not necessarily mean its demise as an economic and financial centre. It will be different from what it was,” says Steve Tsang, director of the China Institute at Soas University in London. “It may be the end of Hong Kong as we knew it, but it will not be the end of Hong Kong.”

Chart showing value of total equity market

Former officials and government advisers say Beijing is determined to keep Hong Kong’s financial fires burning partly because it needs its fundraising prowess to spearhead an ambitious plan to develop the Greater Bay Area, a zone of some 70m people in southern China with an annual gross domestic product already greater than that of Australia, Indonesia or Mexico.

“Beijing will do everything it can to help Hong Kong fulfil its role as a fundraising centre for the Greater Bay Area and southern China’s window to the world,” says a former senior Chinese official in Hong Kong, who declined to be identified. “But it is time that Hong Kong worked hard for mainland China’s benefit, not just for itself.”

The national security law — which targets offences vaguely defined as secession, terrorism, subversion and collusion with foreign forces — was imposed to stamp out mass protests for greater freedoms in the territory last year which sometimes flared into violence.

The law spooked many international funds and businesses. A survey conducted in early August by the American Chamber of Commerce in Hong Kong — which has at least 1,500 members — found that 75 per cent of respondents felt pessimistic about Hong Kong’s business prospects in general and 39 per cent planned to move capital, assets or operations out of the city.

Wang Huiyao, Center for China and Globalisation president, has called for a return to order and stability in Hong Kong
Wang Huiyao, Center for China and Globalisation president, has called for a return to order and stability in Hong Kong ©  Imaginechina/Alamy

Several respondents expressed fears over the new law’s impact on the integrity of governance of the territory, including over the financial system.

But Beijing argues that far from destabilising affairs, the new law is bringing much-needed calm to the territory. “What China, Hong Kong and the international community most need from Hong Kong is stability and a return to order,” says Wang Huiyao, president of the Center for China and Globalisation, a think-tank in Beijing.

“If law and order can be maintained, there will be strong interest from all over the world to continue to invest in this region . . . as investors search for fast growth and fast returns,” adds Mr Wang, who advises China’s State Council, or cabinet. “Hong Kong is the financial centre that will fill this vacuum. The listing of Ant Group is attracting many US investors and pension funds so that they can catch up on China’s rise.”

Bar chart of IPO proceeds in 2019 ($bn) showing Hong Kong stock exchange is on a roll
Chart showing Top performing global stock exchanges

Attracting US money

Ant Group’s planned IPO is exerting an almost mesmeric pull on Hong Kong imaginations. This is partly due to its size. If the projections of financial analysts prove correct, the launch could raise more than $30bn, potentially surpassing the record $29bn raised by Saudi Aramco last year.

But beyond its size, the listing also encapsulates elements of Beijing’s vision that Hong Kong should serve the mainland. As tensions escalate between the US and China, Ant Group is not offering shares for sale in the US but is tapping top investment banks such as Citigroup, JPMorgan and Morgan Stanley to pull in all-important American institutional money.

In this regard, the listing is designed to suck in US funds to further one of Beijing’s strategic aims: the creation of a technology and finance network in the Greater Bay Area that has the momentum to become a world leader.

Underlining such ambitions, Hang Seng Indexes has launched a tech Index, to track some of mainland China’s biggest technology companies. Several of these companies, such as Alibaba, JD.com and NetEase, have their primary listings in New York but have recently launched “homecoming” secondary listings as US-China tensions have risen. Ant Group is expected to be included in the tech index.

The world’s longest sea-bridge connecting Hong Kong, Macau and mainland China is a cornerstone of the Greater Bay Area project
The world’s longest sea-bridge connecting Hong Kong, Macau and mainland China is a cornerstone of the Greater Bay Area project © Anthony Wallace/AFP

Such “homecomings” represent a huge potential windfall for Hong Kong’s financial prospects. China Renaissance Securities, an investment bank, says there are 32 US-listed Chinese companies with a total market capitalisation of almost $200bn that qualify for such listings.

Even if only a proportion of these was to go ahead in Hong Kong over the next few years, the impact would, at a minimum, shore up the market, say investors.

“Hong Kong became a thriving international financial centre because it was, and is, a gateway to China,” says Karine Hirn, partner at East Capital, an investment fund. “I realise there is some uncertainty right now but . . . I actually see a possibility that [Hong Kong] becomes a more dynamic financial centre as it gets a boost from China’s business influence.”

She adds that Ant Group’s profile — as a fast-growing tech company — reflects another Hong Kong market trend. Whereas a few years ago Hong Kong attracted its fair share of huge but unexciting mainland banks and other state-owned enterprises, it now plays host to an increasing number of dynamic technology companies.

The difference can be seen in Ant’s own recent history. When its IPO was first mooted five years ago, the company was worth about $50bn and its business was limited mainly to Alipay, a digital payments service. Now it is thought to be worth up to $300bn and has been transformed into a financial supermarket — serving more than 700m people. It operates the world’s largest online payments platform and money market fund, as well as a consumer credit company and an online bank. 

Its IPO — a joint listing in Hong Kong and Shanghai, potentially in October — will signal a huge capital infusion into one of the country’s most innovative companies while reinforcing China’s tech ecosystem and underlining Hong Kong’s status as a financial centre.

Globally, Hong Kong was ranked third in terms of equity funds raised by financial centres in the first half of this year. But with the expected boost from Ant Group, the territory may find itself vaulting closer to its 2019 position when its exchange raised more capital from share issues — $40.4bn — than any of its rivals, according to data compiled by KPMG.

Alipay and WeChat QR codes for online payment are seen at a market in Nantong in China’s eastern Jiangsu province
Alipay and WeChat QR codes for online payment are seen at a market in Nantong in China’s eastern Jiangsu province © AFP/Getty

Exercising power

Away from the excitement in financial circles, however, Hong Kong remains full of misgivings. Not only is the crackdown on dissent putting society on edge but concerns are also growing that the mainland officials who oversee the territory’s affairs will seek to expunge civil liberties to such an extent that business starts to suffer.

Some industry sectors in particular are seen as vulnerable. “People in media businesses or academics are obviously in for a rough ride and may have to leave,” says one prominent business analyst, who declined to be named. “Banks and trading houses should be OK but there are a range of short, medium and long-term risks, which will hit different firms in different ways.”

Joshua Wong, a leading Hong Kong pro-democracy campaigner — who expects to be arrested in the coming weeks — is clear about how he sees the future unfolding. The media will be muzzled, the independence of the judiciary will be eroded, elections may be cancelled and cameras will be installed on the streets to impose mass surveillance, says the 23-year-old.

charts showing headcount at companies with 10 or more licensed employees

Kurt Tong, who served as US consul-general in Hong Kong for three years until June 2019, says Beijing’s strategy of suppressing political opposition without denting business vitality is layered with risk. Although inflows of “red capital” from the mainland plus the draw of the Greater Bay Area vision are expected to help buoy fortunes, questions of governance loom large, he adds.

“A harder question is whether Hong Kong will continue to remain regionally or globally relevant and be more than just an unusually sophisticated part of China. The key to this will be the continued rule of law,” says Mr Tong.

Much is riding on how delicately Beijing exercises its power. If authorities crack down on journalists who uncover corruption, abuses may proliferate. If professional services firms are encouraged to turn a blind eye to some accounting irregularities, trust may be eroded. If researchers who criticise China’s state-owned enterprises find that their work visas are terminated, transparency will suffer. If an insider culture dominated by well-connected mainland Chinese families takes hold, businesses will fear an uneven playing field.

Protesters clash with police following an anti-extradition bill march last year in Hong Kong. Much is riding on how delicately Beijing exercises its power
Protesters clash with police following an anti-extradition bill march last year in Hong Kong. Much is riding on how delicately Beijing exercises its power © Chris McGrath/Getty

There is much to lose. Hong Kong has more than 160 licensed banks and some 1,600 asset managers that source much of their money from the US, Europe and other parts of Asia. A large foreign exchange market also depends upon trusted enforcement of regulations to thrive, as does a bond market that is Asia’s third largest.

On top of existing uncertainties are some chill winds emanating from Washington. One issue that is gaining prominence is whether US pension funds should be permitted to invest in Chinese IPOs.

Earlier this year, President Donald Trump ordered the main US federal government pension fund not to invest in Chinese companies. The intervention came as the Federal Retirement Thrift Investment Board, an agency that manages almost $600bn in its “Thrift Savings Plan”, prepared to shift the international component of the fund into an index that includes Chinese groups.

Charts showing change in licensed employees since January 2019

Some US campaigners suggest that such advice should be broadened to bar US investors from buying shares in Chinese companies on US “entity lists” that identify them as perceived risks to US security. Ant Group is not on such a list, though its planned acquisition of US money transfer company MoneyGram was rejected by US authorities in 2018 because of “national security” concerns. 

“US investors would be wise to avoid purchasing or holding the equities or debt of Chinese enterprises . . . that have been sanctioned by the US — including placement on the Entity List — for national security and human rights abuses,” says Roger Robinson, president and chief executive of RWR Advisory Group, a Washington-based research and risk management consultancy.

Little sign of restraint

More broadly, Hong Kong’s destiny may be determined by how heavy handed Beijing officials who oversee the territory become. In private conversations, mainland officials talk of their intentions to adopt a “light touch” in enforcing the national security law.

But so far, Mr Tong says, there is little sign of restraint. “The question is whether mainland officials can resist the temptation to get involved in areas such as freedom of information and financial regulation that will most impact Hong Kong’s most competitive sectors,” he adds.

Since the start of the demonstrations last year, more than 9,600 people have been arrested and more than 2,000 charged. Since the new law was imposed, dozens of key pro-democracy figures have been detained including two lawmakers, Lam Cheuk-ting and Ted Hui, detained hours after Ant filed for its IPO.

A raid by police in August on the offices of Apple Daily, one of the few Hong Kong news outlets that Beijing does not control, has persuaded many in the domestic and international media to fear the future. Officers confiscated materials after cordoning off sections of the newsroom.

Jimmy Lai, the paper’s founder, was arrested under the new national security legislation along with eight other men, including two of his sons. Mark Simon, an aide to Mr Lai and an American citizen, is also wanted by police but is not in Hong Kong. In spite of his situation, Mr Lai — who was released on bail — remains a vocal critic of Hong Kong authorities. “HK is now worse than a third world city, with the #PoliceState taking over the rule of law,” Mr Lai wrote on Twitter this week.

Jimmy Lai (C), who founded local newspaper Apple Daily, is arrested at his home in Hong Kong in April
Jimmy Lai (C), founder of local newspaper Apple Daily, is arrested at his home in Hong Kong in April © Vincent Yu/AP

Everything changed, Mr Wong says, once Beijing imposed the national security law. “I would say that Hong Kong was not Hong Kong any more after 11pm on June 30,” he adds, referring to the time the law was announced.

His views are echoed, to varying degrees, by many among the 7m inhabitants of the city. But the reaction to the Ant IPO suggests that while civil liberties are under attack, Hong Kong still has an appetite to thrive economically.

This article has been modified to identify Hang Seng Indexes as the creator of the Hang Seng Tech Index, not the Hong Kong Stock Exchange as previously stated.

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