THE CHATTER: Protests raise fears for Hong Kong banking sector
PEERING down from their gleaming tower blocks at pro-democracy activists on the streets, Hong Kong’s bankers and traders cannot help but worry that the island’s financial community will pay a heavy price if the city further infuriates Beijing.
Hong Kong lives with the threat that its crucial role as China’s biggest yuan hub will become diminished as business flows to the mainland’s growing financial centres, Shanghai and Shenzhen.
The past week has seen the strongest protests yet in the former British colony against Beijing’s control. The idea that Hong Kong could become a hotbed of social discontent raises questions for bankers about how long the city can expect to receive the special treatment that has helped it to generate enormous business from China’s strategy of internationalising the yuan.
“Hong Kong has served its purpose and maintained its lead because it is a Chinese city with Western characteristics,” said the Asia-Pacific treasurer for a European company in Hong Kong who requested anonymity. “The city risks squandering that advantage quickly if the political uncertainty continues.”
Bankers elsewhere in Asia were more blunt. “This hurts Hong Kong’s status as the biggest offshore yuan hub in the long term because the political risk has increased significantly,” said Sean Yokota, head of Asian strategy at investment bank Skandinaviska Enskilda Banken AB, in Singapore.
Since being returned to Chinese rule in 1997, Hong Kong’s free-wheeling capitalism has provided China with a gateway to the world as it makes its own transition to a more market-driven economy. Nowhere is this more evident than in the country’s efforts to increase use of the yuan in global trade and commerce.
Hong Kong handles about 80% of China’s global trade settled in yuan and has the world’s biggest offshore yuan deposits of almost a trillion yuan (about R1.8-trillion). That has been possible only with Beijing’s blessing.
Asked about the ramifications of the pro-democracy movement back in July, a senior Chinese official gave an acid response. Hong Kong’s offshore yuan business was an “ever-growing slice of cake. but if it doesn’t want to eat it, that’s its own problem”, said Guo Jianwei, deputy director-general of the monetary policy department of the People’s Bank of China.
In 2010 Hong Kong’s market share was more than 90%. It is now put at 53% — although the decline is mitigated by the massive growth in global offshore yuan transactions.
Less than 1% of China’s total trade was transacted in yuan in 2009 but it is now more like 20%.
China rules Hong Kong under a “one country, two systems” formula that accords it some autonomy and freedoms not enjoyed in mainland China, with universal suffrage ostensibly an eventual goal. Hong Kong’s separate legal system has given the financial community some sense of comfort. But given the scale of dissent, dealers in Hong Kong wonder whether China will give a renewed push to promote free-trade zones opened on the mainland during the past few months.
As China pursues the internationalisation of its currency, the need for an offshore trading centre in the same time zone will become less compelling. But, with most reforms still a work in progress, there is little chance of a sudden loss of business. While the government is allowing foreign investors more access to its onshore markets, it is also encouraging other financial centres, from Sydney to London, to trade in offshore yuan.
China is considering raising quotas for foreign investors, to allow more investments in onshore markets, and a scheme linking the Hong Kong and Shanghai stock markets is due to start this month.
The reforms have not been quick enough to spark a sudden rush to relocate from Hong Kong to the mainland but there could be more discussion in boardrooms after the events of the past week.
