Global Capital Markets and the Big Bang of Finance
Jan 19, 2022
15 mins

When I joined HKEX in May 2021, I was incredibly excited to be joining a firm set to play a major role in shaping the future of global markets; a connected, necessary, complex and fast-evolving industry. And over the recent holidays, I took some time to reflect on those thoughts of nearly a year ago, becoming ever more convinced that Hong Kong is pivotal both to the dynamic and vital role of markets but also to our collective shared future and prosperity.

Stepping back and looking at the big picture, it is clear to see that visions for our post-pandemic world are turning into action: big policy initiatives such as ‘Build Back Better,’ the ‘European Green Deal,’ and the global ‘net-zero transition,’ together with a conveyer belt of tech developments and innovations are changing our daily lives as we speak: I see not just the green shoots of recovery in the world economy but something more profound.

Yet we all know that the picture is not all rosy. Covid continues to constrain us, filling the headlines and our dinner conversations; and the world still feels fragile, with the geopolitical tensions that characterised last year continuing to dominate. Against this, it is my belief that business and markets, entrepreneurs and environmentalists, job-creators and evangelists continue to connect.

Continued growth in China’s economy and fundamental changes in the financial sector will drive the Big Bang of Finance

This will be imperative for navigating the path ahead. And I see Hong Kong’s role in this context as one of increasing vibrancy, growing connectivity, rising cross-border flows and accelerating innovation - all contributing to a far-reaching, fundamental evolutionary process happening that will reshape global financial markets forever, feeding into the tectonic economic shifts that we are witnessing – and in turn creating opportunities for all of us.

I call this process the Big Bang of Finance. This is a once-in-a-generation structural change to global finance that is happening as I write. When we look at a 10 year horizon, I feel pretty confident that we are going to see China’s onshore capital markets continue to expand in breadth and depth, with its equity and bond markets combined surpassing the USD 100 trillion mark over the next decade or so.

Continued growth in China’s economy - expected to be the world’s largest in the next 10 to 15 years – and fundamental changes in the financial sector will drive the Big Bang of Finance. Households will redistribute part of their estimated USD 50 trillion in investible assets from deposits to financial products, and further reforms to open capital markets and drive RMB internationalisation will accelerate capital flows into and out of Mainland China through Hong Kong.

You don’t need to be an economist, a mathematician or an algorithm expert to come up with these figures. If you look at China’s capital markets in the past two years you can see explosive growth, with the combined value of the onshore bond and stock markets growing from USD 18.6 trillion to USD 30.7 trillion between 2018 and 2020.

Whilst the past is of course never a linear prediction of the future, assuming pretty conservative metrics for both China’s economy and capital markets we think China’s onshore markets will grow past USD 100 trillion in the next ten years. That’s like creating a capital market the size of the US’s financial markets in a decade!  

How the Big Bang of Finance will affect cross-border flows

Momentum for the Big Bang of Finance is expected to come from a reallocation of domestic household wealth into China’s bond and equity markets, inflows of international capital and the increased presence of domestic institutional investors.   

The size of domestic household wealth alone is significant, McKinsey estimates that household investible assets in China will grow from RMB 205 trillion (USD 32 trillion) in 2020 to RMB 328 trillion (USD 52 trillion) by 2025.

And as this asset base grows, it is a widely held view that we can expect to see a redistribution from deposits and real estate investment into capital markets and more diversified financial products.

And domestic and international investors are already driving a rapid acceleration in cross-border capital flows ― the pioneering Connect programmes, expanding index inclusion and the wealth of new products are fueling the insatiable investor appetite to diversify  holdings. 

Four trends

So, what will happen next? Just as The Big Bang 14 billion years ago began a series of processes that created and expanded the universe as we know it, so will the Big Bang of Finance impact global financial markets.

In many ways, this has already started: the stream of reforms introduced to China’s financial markets in recent years has already begun the process by which the orbit of global markets has begun to steadily shift towards the East, and specifically China.

I have no crystal ball, but this trajectory looks set to continue.

Look firstly at how  equity markets in Mainland China and Hong Kong are growing their share of global capital raising ― bringing in a total of USD 60.3 billion in H1 2021, up 95% y-o-y, and taking 27.2% of the global market, according to Ernst & Young data.

With its innovation engine running at full speed and a vibrant entrepreneurial scene, especially in the new-economy sectors, the outlook for capital raising is strong. In 2021, China saw 74 new unicorns, taking the total number to 301, according to the Hurun Research Institute.

And this is not peculiar to equity as an asset class: Mainland China’s bond markets are also transforming ― at USD 18.6 trillion at the end of 2020, they are now the second largest in the world having quadrupled in size in just eight years. The reforms to the bond markets in 2021 look set to push the trend further. 

The investor base behind these flows is also changing. Mainland China’s market is opening up and increasingly we are seeing the integration of domestic and international capital flows: step by step we expect this to continue, with greater sophistication emerging in the Mainland amongst both the international and domestic investor base. 

Much of the growth in foreign ownership in domestic securities has been facilitated by regulated and trusted infrastructure already in place. As we look to further build out the Connect programmes here in Hong Kong, such as the recent developments with Southbound Bond Connect and the recently announced inclusion of ETFs in the Stock Connect programme, we’ll also see better, more efficient two-way capital flow too.

Finally, the RMB perhaps represents the greatest lever for change: and I am convinced it will take on an ever more important role in the global financial landscape. International demand for the RMB has grown exponentially through increasing international trade and cross-border investments along with China’s economic growth. Together with the trends we see above, plus the RMB’s inclusion into IMF’s Special Drawing Rights currency basket in 2016, deep, liquid pools of RMB assets will be essential for international investors in the future.


Hong Kong: Uniquely positioned for the Big Bang of Finance

For years Hong Kong has been a conduit between East and West, a vital global hub supported by its deep talent pools, robust infrastructure, internationally-aligned regulatory regimes and practices, free-flow of capital, and transparent, open and globalised markets. And today, I believe Hong Kong’s role is more vital than it has ever been.

Hong Kong is where global investors come to trade Chinese underlying, and where Chinese capital goes to invest in international markets. It remains a trusted, liquid, safe, proven and scaled international financial centre. Hong Kong is China’s premier offshore fund-raising centre, a global asset management and risk management hub, and the world’s largest offshore RMB liquidity pool with total deposits of RMB 868.7 billion at the end of November 2021.

Hong Kong is also a key funding centre for new economy companies, driving the economic transition in the Mainland and global markets.  New economy companies have accounted for a large share of IPO funds raised in Hong Kong in recent years ― 87% in 2021, rising from 64% in 2020 and 49% in 2019.  In particular, after the reform of the listing regime in 2018, Hong Kong has become Asia’s largest and the world’s second largest biotech fundraising hub. A total of 34 biotech and health care companies were listed in Hong Kong in 2021, which made us rank first by the deal number and second by the amount of funds raised globally.

Hong Kong is right in the centre of the Big Bang of Finance and fulfils a unique role as an offshore market for China with close connectivity onshore. Hong Kong’s internationalised market regime provides the perfect testing ground for innovative financial products and the process of RMB internationalisation.

The success and demand for HKEX’s recent innovations, such as the introduction of the MSCI China A50 Connect Index Futures contract, our expansion in Stock Connect underlying, and our new SPAC regime point to the demand we are seeing. We are not seeing decoupling, we are seeing greater integration in markets and greater demand from investors regionally and globally. The Big Bang of Finance is happening, and it is happening now.


Looking to the future

Hong Kong must remain nimble and responsive. It must look to make its markets ever more competitive and attractive. And if it succeeds in this, it will be uniquely placed to support China’s continued growth ambitions, to help deliver the returns as well as benefits from assets diversification so eagerly sought by global investors, and to fuel the dreams and aspirations of the regions entrepreneurs, visionaries and job-creators.

The Big Bang of Finance isn’t something that will happen at some point in the future. This is happening now, and Hong Kong is where the action is. It is up to all of us to make the most of this incredible opportunity.

Wishing you a happy, healthy and prosperous year ahead!