It’s been 20 years since Hong Kong was returned to Chinese sovereignty, and many people have recently been reflecting on the past 20 years and how our city has changed. From a financial standpoint, we have proven to be nimble and competitive, which has allowed us to reap the benefits of Mainland China’s economic expansion.
In my view, three key events have contributed substantially to China's success over the last three decades: (i) through-trade, giving China its first “bucket of gold”; (ii) foreign direct investment, making China the "manufacturer of the world"; and (iii) capital market fundraising, making China's big industrial and financial companies among the largest in the world in terms of market capitalisation. In all of these events, Hong Kong has been the instrumental facilitator. In essence, Hong Kong has been China's primary offshore capital formation centre.
By focusing on these three things — each of which are distinct and helped China at different stages of its evolution — Hong Kong was able to leverage its advantages, provide value to the Mainland, and capture the benefits of a vastly expanded capital market. In fact, largely thanks to China’s economic boom, Hong Kong finished first in IPO funds raised in five out of the last eight years, a truly remarkable achievement. One common characteristic that defines all three events is that money flows into China. In other words, China has been a capital importer throughout the last two to three decades.
Looking into the next 20 years, however, big changes are on the way. China has plenty of capital now and its growing challenge is to find a fast, yet safe, way to deploy that capital globally. Therefore we need to diversify and grow our financial market to grasp the opportunities that will come from the trillions of dollars China is expected to deploy globally over the next two decades, and we will do this in three ways: by becoming China’s global wealth management centre, RMB pricing centre, and risk management centre.
To become a wealth management centre, we need to offer Mainland investors a full variety of products to meet their international investment and diversification needs. With the unprecedented access provided by both Shanghai Connect and Shenzhen Connect, Hong Kong now has a unique opportunity that we must capitalise on.
On the risk management side, we aim to become the top offshore risk management centre for managing cross-border investment risks. We have rolled out a number of products, such as our RMB Currency Futures contracts, to provide investors with hedging tools to manage currency risks.
And third, we aim to become China’s global asset pricing centre. Chinese capital is already being deployed in overseas markets, and this trend is expected to accelerate over the next decade. As that happens, the RMB will be used more and more as the main settlement currency, which opens up an opportunity for Hong Kong to leverage its transparent regulatory and legal regime and trust of Mainland China and international market players to become a global RMB asset pricing centre.
There’s also one more thing that presents an opportunity for Hong Kong, and could be a catalyst as we develop our three major “centres”: the Belt and Road initiative.
I know this concept is still a bit fuzzy to most people outside China, and even to many people inside the country! Chinese leaders often emphasise “Belt and Road”, but it still seems remote and not directly related to our daily lives. But the scheme is real, and too important to ignore.
In a nutshell, the Belt and Road initiative is a co-development scheme for about 60 countries along two key transport routes stretching from China to Europe. It is a concerted effort by China’s Central Government to aid in the development of emerging economies, many of which are in desperate need of infrastructure investment. These investments are designed to result in economic growth and prosperity across the region.
China is willing to be the first mover and help fund some of these projects, even taking on the initial risk of loss. But for this initiative to succeed in the longer term, China cannot fund everything alone. Foreign investment and know-how will need to be leveraged, too.
This is where Hong Kong fits in.
At the moment, many of the Belt and Road countries are resource rich but cash poor. They require big investments into ports, roads, bridges and railroads before they can realise their full economic potential. There are a number of ways Hong Kong can play an important role in coordinating the investments and diversifying risk: (i) by helping to list the resource assets in Belt and Road countries to raise capital to fund development of the resources; (ii) allowing the listed entities to help their country to raise debt financing for infrastructure projects by providing the listed securities as collateral; (iii) providing tools to manage commodity price risks, given the enormous demands of these infrastructure projects; and (iv) by leveraging Hong Kong as an RMB pricing centre.
Initial funding for Belt and Road infrastructure projects could take the form of equity, debt and even asset securitisations. Hong Kong, having served as China’s primary offshore capital formation centre for the past several decades, is ideally suited to performing these roles.
Widespread infrastructure development in emerging economies could also have the potential of triggering a commodities boom, which leads to commodity pricing risk. Six metals contracts denominated in RMB are already trading on our Hong Kong platform, and we could provide other ways for investors and end-users to manage risk and control pricing power. As the leading metals exchange in the world and with a whole host of hedging and risk management options, the London Metal Exchange would also have a role to play.
Finally, with China being the primary driving force behind Belt and Road, it is expected that many of these investments will be priced in RMB. However, to ensure the RMB is widely accepted by Belt and Road countries and by investors, there must be a range of interest rate and FX hedging tools available – which is where Hong Kong comes in again. Ultimately this could accelerate the internationalisation of the currency and potentially drive the growth of Hong Kong as an RMB pricing centre, which is one of our three main objectives.
As you can see, Hong Kong is uniquely and ideally positioned to provide value to the Belt and Road projects. With investments of this scale and involving countries with various stakeholders and different political, economic, and regulatory priorities, all sides prefer a neutral, trusted venue. Hong Kong has earned the trust of both Mainland China and the international investment community because of our experience, institutions, regulations, and international standards required of a financial centre that could facilitate such large-scale investment projects. We can leverage these advantages to provide a platform to collate resources, raise funds, and diversify risk for Belt and Road projects while fulfilling our own objective of growing into a wealth management centre, risk management centre, and RMB pricing centre.
Hong Kong enjoyed much success over the past 20 years, and I’m confident even more exciting opportunities lie ahead. China’s continued economic development along with the Belt and Road initiative are two great catalysts that will help us continue to grow and stay relevant to both our Mainland and international customers over the next 20 years and beyond.
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