There has been some pessimism lately about China's economy that has seeped into concerns about Hong Kong's future. This was underscored recently when major international ratings agencies lowered the outlook for Hong Kong, and just a few days later we fell outside of the top three major global financial centres index for the first time. Naturally, people are getting antsy about our future. My Hong Kong friends wonder if we should tie our future so closely to the Mainland, and some in the Mainland ask if Hong Kong is even needed now that the country has become so strong.
So what does our future hold? Do Hong Kong's advantages still exist? Can we still be a major financial centre in the world? To answer these questions, we need to take a quick trip down memory lane…
Three big things Hong Kong has done for China
Hong Kong's success today is largely attributed to how it has harnessed the opportunities presented by China while also assisting the country as it develops, every step of the way. Hong Kong has made three key contributions to the Mainland's reform and opening over the last 30 years: the entrepot trade ended up bringing China its first bucket of gold; foreign direct investment (FDI) enabled it to become the factory of the world; and fundraising in Hong Kong’s capital market gave birth to Chinese companies that have become world leaders in telecommunications, energy, banking and insurance. We were able to do this because we had a unique system in place, one that was different from the Mainland, and one that helped facilitate the Mainland’s development. We added value to China, and we reaped the benefits.
One central theme of this development over the last 30 years was capital inflows. China was poor and needed capital for development, so Hong Kong served as a reliable fundraising centre. China, however, as we all know, doesn't lack for funds anymore. It is a capital-abundant country seeking new investment channels, not more funding ones. So does it still need Hong Kong?
The answer, of course, is a resounding yes. Hong Kong's open markets, legal environment, transparent and internationally-recognised regulatory system, robust markets, and pool of highly-trained and bilingual professionals is unmatched in the Mainland. This unique environment in Hong Kong has been built up over generations. So while cities like Shanghai and Shenzhen may have surpassed Hong Kong in terms of the hardware, it will take them much longer – if ever – to surpass Hong Kong in terms of software.
That doesn't mean we can be complacent, though. China is evolving quickly, and Hong Kong has to leverage these advantages as it adapts to remain competitive. The next 30 years will be marked by the two-way flow of Chinese capital, so it is imperative that Hong Kong adjust, as we've always done, in order to continue to provide value to the Mainland while cementing Hong Kong’s position as a global financial centre.
The next three big things Hong Kong can do for China
There are three big things Hong Kong can do to add value to China going forward. First, Hong Kong can become China's global wealth management centre. A few years ago, domestic wealth was mainly held in real estate and bank deposits, and then in stocks and bonds. But China lacks more diverse investment instruments, as the products available on the Mainland don’t meet the needs of sophisticated investors who are seeking international asset diversification. Some, with the willingness and know-how, have begun to invest directly abroad, but the rest are still nervous and unsure of their options. As China's capital controls are set to remain for the foreseeable future, we aim to strengthen Shanghai-Hong Kong Stock Connect and launch Shenzhen Connect so Mainland investors can use these secure, reliable channels to invest abroad in a familiar market environment. It’s a key step towards developing Hong Kong into an offshore wealth management centre for China.
Secondly, Hong Kong can become the top offshore risk management centre for managing onshore investment risks. Interest rate and exchange rate controls in China mean the debt and currency derivatives markets are not mature enough to meet investors’ sophisticated risk management needs. Furthermore, while the Mainland's stock markets are relatively open, the derivatives market is not, leaving international and domestic investors unable to properly hedge and manage risk.
This creates a natural opportunity for Hong Kong, which already has both domestic and foreign investors in an environment that is largely trusted and familiar to both sides. We are seeing the potential now with rising volumes of our RMB currency futures contract as a way to hedge risks from the two-way fluctuation in the RMB exchange rate. We are now set to launch more RMB currency futures pairs against the US dollar, Euro, Australian dollar, Japanese yen, and many other currencies to meet rising demand.
Thirdly, Hong Kong can become China's global asset pricing centre. As Chinese capital goes global over the next 30 years, Chinese investors will no longer just play a creditors’ role in overseas markets. They will buy goods, commodities and acquire interests in overseas companies. As more international equities and commodities are priced in RMB, China will be able to gradually master the RMB exchange rate and interest rate pricing worldwide.
To become an international pricing centre, however, a market must be recognised and accepted by all parties as transparent with a robust legal regime in place. Hong Kong, with its "two systems" formula, is “home” for Mainland investors but also trusted by international ones, making us a great first choice as an overseas pricing centre.
If we can develop these three "centres", we will be able to continue in our unique and irreplaceable role of facilitating China's development while securing Hong Kong’s prosperity for another generation and beyond.
"One Country, Two Systems"
Whether Hong Kong can accomplish these goals depends entirely on the sustainability of the "One Country, Two Systems" principle. "One country" means the Mainland can trust Hong Kong to help the country in the city's pursuit of further growing its financial markets, while "two systems" is the lynchpin that gives international markets the confidence to integrate with China through Hong Kong.
"One Country, Two Systems" is not an easy topic to discuss, particularly in the current social environment in Hong Kong. As Chief Executive of HKEX, I am touching on this because it is essential to our markets’ future. Realising Hong Kong's potential means the Mainland must feel confident that "one country" is not challenged and Hong Kong can be relied upon, while international and Hong Kong communities believe "two systems" must be fundamentally preserved.
I have been in Hong Kong for more than 20 years, and there has never been serious opposition to "one country", though there have been recent murmurs in Hong Kong out of anxiety over the future of "two systems". My associates on the Mainland sometimes ask me why, if Hong Kongers don't object to "one country", they don't show more enthusiasm for the nation. "Why don't they speak up against those who have doubts about China?" they ask. Well, my answer is because we have "two systems". Hong Kong deals with these issues differently than the Mainland does. Hong Kong should be allowed to handle uncomfortable opinions in the city's own way under "two systems".
Conversely, Hong Kong people need to also recognise that "One Country, Two Systems" for Hong Kong is in-line with the country’s development. China is already rich and powerful, so it doesn't need another Shanghai, Shenzhen, or Guangzhou – it needs a unique Hong Kong. It is in Hong Kong and the Mainland’s interest to preserve the "two systems". We should feel confident in our abilities and the soundness of “two systems” and not allow our concerns to create the perception of opposition to "one country", because it is not in the fundamental interests of Hong Kong or the Mainland.
The Right Questions
Hong Kong is facing many challenges today, and overcoming them requires the collective wisdom of all of us. We can't let negative emotions get in the way. We need to ask the right questions to get the right results.
Therefore, "Could Hong Kong be prosperous without China?" is the wrong question in my view. The correct question should be: "Why would we want to separate a prosperous Hong Kong from China?"
Conversely, on the Mainland, a question may be: "Why does China still need Hong Kong?" Instead, the correct question is: "Will a prosperous, stable, confident Hong Kong make China even better?"
If we ask the right questions, we can get the right answers. Hong Kong and the Mainland are both unique – and different – in many ways. This means they can complement each other to the benefit of both sides. Hong Kong’s success in the past is a reminder of how we can achieve prosperity in the future.