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20 Nov 2012

Chinese success rubs off on Hong Kong

Anita Fung

by Anita Fung

Chief Executive Officer, HSBC Hong Kong

Hong Kong has navigated choppy waters and delivered strong growth

Hong Kong has navigated choppy waters and delivered strong growth

When we look at how Hong Kong is thriving today, it is salutary to remember that in July 1997 some doubters feared it might become “just another Chinese city”, and the gloomiest even talked of emigrating. Instead, it has delivered a decade and a half of growth. Along the way it weathered the Asian crisis of 1998, the dotcom crash of 2000-01, the SARS outbreak of 2003, and the banking meltdown of 2008.

See how they grow
GDP growth (%) 2011 2012F 2013F
World 2.6 2.2 2.4
Hong Kong SAR 5.0 2.0 5.2
China 9.3 7.8 8.6
Asia-Pacific 3.9 4.5 4.9

Source: HSBC Global Economics Quarterly, 27 September 2012

What the doubters missed was the great leap forward taking place in China and the opportunities this created. China’s GDP has grown 35-fold in three decades, making it the second largest economy in the world.

Such phenomenal growth created opportunities for Hong Kong in banking, currency trading, fund management, tourism and in helping mainland Chinese companies to connect with foreign markets.

Last year it was the source of 66 per cent of foreign direct investment (FDI) into China, and in return received 60 per cent of Chinese overseas direct investment (ODI). Hong Kong has benefited particularly from the prosperity of the neighbouring Guangdong region, whose growth rate exceeds that of the Mainland as a whole, averaging 11.5 per cent a year over the past five years.

Guangdong, which Group Chief Executive Stuart Gulliver described as “the epicentre of China’s economic growth” has many fast growing companies, but they need help in accessing export markets.

Tourism from the Mainland has been an important earner for Hong Kong. China now has an estimated 1.2 million high-net-worth individuals – those with assets of more than RMB10 million (just under USD1.6 million). As people grow more affluent, they travel; in 2011, two-thirds of Hong Kong’s 42 million visitors were from the Mainland. Tourist trade has grown enormously since visits were liberalised in 2003.

As the RMB goes global, other centres may benefit, but Hong Kong will be the leader

As the most open economy in the world, Hong Kong has challenges. Economic uncertainty in the West has slowed its recent growth. In some parts of Asia social instability is a concern. Investment inflows from mainland China can be huge and need careful management. But coping with high demand is a good problem to have.

As a financial centre, Hong Kong goes from strength to strength. The Hong Kong stock exchange is not only the world’s sixth largest by market capitalisation but was the largest market globally for initial public offerings in 2010 and 2011. By July 2012, it had 710 Mainland companies listed. As debt, recession and banking woes take their toll on rival stock markets, Hong Kong is mounting a strong challenge to their dominance.

The financial industry, with 155 fully licensed banks and nearly 10,000 financial services companies, is mature and competitive. It employs more than 220,000 people, more than 6 per cent of the workforce. The fund management sector runs about USD1.3 trillion of assets.

Hong Kong is the leading Asian hub for hedge funds and the second largest for private equity funds. Though foreign fund managers worry about the speed of approvals, it is the largest hub for qualified foreign institutional investors in China.

HSBC in Hong Kong
Nine months to Sep 2012
USDbn
Net operating income 9.1
Profit before tax 5.6
Loans and advances 170
Cost-efficiency ratio (%) 39.4
Return on risk-weighted
assets (%)
6.9

Source: Interim Management Statement, 3Q 2012

Importantly for the future, it is the premier offshore RMB business centre and benefits from the currency’s growing internationalisation.

The RMB is making progress on three fronts: as a global trading, investment and reserve currency.

Since the pilot launch of the cross-border RMB trade settlement scheme in June 2009, its use for trade settlements has grown rapidly, reaching RMB2.08 trillion in 2011.

The offshore RMB market was established in Hong Kong in July 2010. From August 2011, Mainland corporates have been able to issue RMB bonds in Hong Kong. FDI in RMB was formalised in October 2011 and 110 projects totalling RMB21 billion were approved by the end of December 2011.

Use of the RMB as a reserve currency is increasing fast. In addition, Japan, Korea and Thailand have approved investment quotas in the China inter-bank bond market (CIBM), and Indonesia is buying CIBM bonds. As the RMB goes global, other centres may benefit, but Hong Kong will be the leader.

Property experts say what matters is “location, location, location”. For Hong Kong, the gateway to China and Asia-Pacific, location has clearly helped. But the real story is how it has seized and maximised these advantages, laying the groundwork for a strong and sustainable future.

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