Drew Bernstein
Hong Kong, once the undisputed financial hub of Asia, has faced significant challenges in recent years. The city, which has long served as a vital bridge between China and the global financial markets, is now grappling with an identity crisis as China’s economy slows and global economic dynamics shift.
Hong Kong’s Decline in Global Financial Rankings
The past few years have not been kind to Hong Kong’s financial standing. The Hang Seng stock index has experienced four consecutive years of losses, plunging nearly 50% since January 2021. Initial public offerings (IPOs) on the Hong Kong Stock Exchange dwindled to $5.9 billion in 2023, a level not seen in two decades. Furthermore, the city lost its top spot on the index of economic freedom to its long-time rival, Singapore, after holding the position for 30 years.
Once the world’s top-ranked stock exchange for IPOs, Hong Kong’s exchange fell to eighth place in 2023, trailing behind India’s stock exchanges and barely outpacing Abu Dhabi. The total market capitalization of stocks listed in Hong Kong, home to giants like Tencent and China’s largest banks, also dropped to fourth place globally, overtaken by India.
The Challenges Facing Hong Kong’s Financial Sector
The downturn in Hong Kong’s financial sector has been particularly brutal for investment bankers, who were once among the highest-paid professionals in the world. With the drop in IPOs and a sharp decline in China’s mergers and acquisitions (M&A) activities, global investment banks like Goldman Sachs, Morgan Stanley, UBS, and JP Morgan have all announced staff cuts in their Hong Kong offices. Meanwhile, Chinese investment banks, such as CITIC and CICC, have gained ground, leveraging their deep connections in Beijing to secure deals.
The wealth management sector, traditionally a pillar of Hong Kong’s financial services, has also taken a hit. As geopolitical tensions simmer, wealthy Chinese clients have increasingly adopted a “multi-shoring” strategy, spreading their assets across multiple low-tax jurisdictions rather than concentrating them in Hong Kong. This shift has contributed to a decline in assets managed by Hong Kong’s wealth managers, further challenging the city’s financial industry.
The Waning Special Status of Hong Kong
Since its handover from Britain in 1997, Hong Kong has operated under the “one country, two systems” framework, allowing it to maintain a unique blend of low taxes, predictable laws, and press freedoms. This status made Hong Kong an attractive destination for global investors seeking to tap into China’s economic growth without the risks associated with mainland investments.
However, Hong Kong’s special status has diminished in recent years. China’s domestic stock exchanges in Shenzhen and Shanghai have overtaken Hong Kong as the preferred venues for Chinese companies to raise capital, especially for firms in strategically important sectors. Foreign investors and multinational banks have largely been excluded from these domestic deals, which has further eroded Hong Kong’s role as the gateway to China.
Moreover, the global appetite for Chinese equities and bonds has waned, spurred by a series of challenges, including insolvencies in China’s real estate sector, unpredictable regulatory changes in the tech industry, and increased difficulties in conducting company research amid heightened security concerns. In 2023, foreign investors sold off 90% of the Chinese stocks they had acquired at the start of the year, and this trend continued into 2024.
Hong Kong’s Path Forward
Despite these challenges, Hong Kong is determined to redefine its role in the global financial system. The city’s leaders have launched a “Hello Hong Kong” campaign aimed at attracting finance executives and tourists back to the city. Officials have assured the international community that Hong Kong will maintain its zero capital gains tax and dollar-convertible currency for the foreseeable future.
Looking ahead, Hong Kong’s future seems increasingly intertwined with that of mainland China. The city’s skyscrapers are likely to host more branch offices of Chinese financial institutions, as foreign professionals decline and mainland Chinese talent moves in under new schemes. Hong Kong’s unique professional talent, which bridges Chinese business practices and global standards, remains a key asset for the city.
One of the strongest reasons to believe in Hong Kong’s continued relevance is its value to China. The city serves as a testing ground for China’s efforts to open its financial infrastructure to the world, with initiatives like the Hong Kong Stock Connect, which links Hong Kong’s stock market with mainland exchanges, and efforts to internationalize the digital RMB.
While the most security-sensitive Chinese companies may continue to list in Shanghai or Shenzhen, Hong Kong will remain attractive for PRC companies seeking global market engagement, access to dollar-convertible financing, and international talent. As Hong Kong’s Chief Executive, John Lee Ka-chiu, stated, the city aims to be a “super-connector” and “super value-adder” for Chinese companies going global.
In this evolving landscape, Hong Kong is transitioning from being the world’s window into China to becoming China’s window to the world.
