The 2019 protests in Hong Kong have left many observers shocked, both inside and outside the special administrative region. Hitherto a beacon of stability, the location did not lose its composure even in 1997, when the UK handed over its sovereignty to China.

Back then, the 50-year deadline of the transitional ‘one country, two systems’ model ending in 2047 seemed distant. On the back of China’s unstoppable economic rise, Hong Kong continued to flourish, and in the process attracted both capital and professional workers from all over the globe to the liberal and modern financial hub.

Mainland influence

Behind the scenes, however, Beijing’s political influence has been on the rise, undermining some of the very pillars of Hong Kong's economic success – first and foremost, its rule of law. The events of 2019 laid bare this influence, making it clear to many that the 2047 deadline is looming large.

“Obviously, Hong Kong’s reputation has been impacted from what we have seen,” says Alberto Vettoretti, managing partner at investment advisory firm Dezan Shira. “If you look at how Hong Kong has been perceived, especially after Moody’s downgraded its outlook to 'negative' [in September 2019], our clients have raised a few questions over Hong Kong still being a financial hub of choice or not.

“Having said that, Hong Kong’s financial hub is still very important [and] is the location of choice for Chinese IPOs, as well as overseas bonds issued by Chinese and foreign companies. I don’t think it will lose, at least in the short term, its advantages as a financial hub despite the likes of China’s Shenzhen and Shanghai growing rapidly.” 

Conflicting evidence

Thus far, early analytical evidence of a possible impact of the protests on Hong Kong’s business environment has been sparse and conflicting. The Hang Seng Stock Market Index, a typical gauge of the financial market, has erased early-2109 gains since the protests erupted in March 2019, but remains in positive territory for the year as of December 3. The market is still a destination of choice for Chinese IPOs, with powerhouse Alibaba scoring the biggest flotation of 2019 globally in late November.

Regarding FDI, official government figures tend to depict a narrative of resilience, rather than one of slump. “I am glad to see that Hong Kong continues to attract and retain leading overseas and mainland companies, as well as entrepreneurs from around the globe who use Hong Kong as the base to set up leading-edge and innovative businesses,” Stephen Phillips, director-general of investment promotion at InvestHK, the national investment promotion agency, said in a press release.

He cited a 9.9% increase over the 2017 figure (as of late October 2019) in the number of business operations in Hong Kong with parent companies overseas and in mainland China, as revealed in a joint survey conducted by InvestHK and the Census and Statistics Department.

However, independent figures compiled by greenfield investment monitor fDi Markets suggest Hong Kong’s FDI appeal has taken a hit. Project announcements in Hong Kong (a typical barometer of FDI sentiment) for January to October 2019 fell to their lowest level for the first 10 months of a year since 2005. Overall economic activity has also slowed sharply, particularly in the retail and tourism sector, and the economy entered its first recession in a decade in 2019.

Rise of rivals 

The current turmoil is coinciding with mounting competition from other financial hubs in south-east Asia and in mainland China. Carlos Casanova, an economist for the Asia-Pacific region at credit insurance firm Coface, says: “We hear anecdotal evidence of capital moving out of Hong Kong. You do have companies that perhaps are considering moving out of Hong Kong into Singapore. 

“Hong Kong-based people running facilities or businesses in mainland China may be moving some of those headcounts to the mainland, closer to the facilities and the market. Some other people with more regional functions may look to relocate to Singapore as south-east Asia becomes a more attractive market for companies.” 

“However, this was already happening before the protests started; perhaps they only have tilted the balance in favour of the move. It doesn’t mean Hong Kong is no longer going to be a financial centre for mainland China. In fact, Hong Kong continues to be a very important financial centre for the mainland because China has a closed capital account. [As long as] China has a closed capital account, Hong Kong will remain China’s gateway to the world.”

With closed capital accounts, companies, banks and individuals cannot move money in or out of the country except in accordance with strict rules. This has made Hong Kong a natural offshore centre for Chinese finance for geographical and cultural proximity.

China's main state and private companies prefer Hong Kong for their listings to connect with an unrestricted global financial audience, while Hong Kong is the biggest hub for offshore renminbi business. Hong Kong-based companies also accounted for about two-thirds of total FDI into China between January and September 2019, according to figures from China’s Ministry of Commerce.

Legal peril

The city’s position as a financial hub is also under scrutiny as the current turmoil weakens the rule of law. “It is difficult to identify specific events or decisions… It is been a subtler series of events, actions or inactions by the government that strongly suggest that Hong Kong is gradually moving away from the rule of law,” says Julien Chaisse, law professor at the City University of Hong Kong. 

“At best, people can get stability until 2047. What is going to happen after that? Nobody knows. If there are many young people in the street, is because they are in their 20s today and will be only in their 40s when the transition is over in 2047. There is no guarantee beyond 2047.”

China has more than a quarter of a century to work out how Hong Kong will best fit into its system, but the clock is ticking. The way Beijing reacts to short-term developments will set the direction of the ongoing transition, while also determining the future prosperity – or not – of Hong Kong and its citizens.