Headwinds hamper Hong Kong’s search for a new identity

November 17, 2013 8:02 pm

Headwinds hamper Hong Kong’s search for a new identity

By Demetri Sevastopulo

One of the traditional pastimes in Hong Kong is worrying out loud about whether the Chinese territory is losing ground to Singapore as a global financial centre. But recently, Singapore has been shunted out of the conversation in favour of Shanghai, mainland China’s financial capital. Everyone from Li Ka-shing, Asia’s richest man, to diners at local restaurants, are asking if the newly unveiled Shanghai free-trade zone will eventually eat Hong Kong’s lunch.Whether the Shanghai project will become the capital markets equivalent of Shenzhen – the special zone created by Deng Xiaoping to launch economic reforms three decades ago – is impossible to tell, as details remain vague. Even John Tsang, Hong Kong’s financial secretary, says he is unclear.

“I think you’re probably in a better position to tell me what you think the Shanghai free-trade zone is,” Mr Tsang jokes. “But … any time that China opens up a bit and liberalises certain parts of the country, or brings in a new reform that serves to open up the market a bit, it must be good for Hong Kong.”

Many people less sanguine than Mr Tsang still believe that the zone is unlikely to pose a near-term challenge, partly because of the strength and independence of Hong Kong’s legal system.

But the undercurrent of concern points to mounting anxiety in Hong Kong about the future of the former British colony as it moves towards full integration with mainland China in 2047. With low personal tax rates and an enviable unemployment rate of 3.3 per cent, Hong Kong remains an attractive place to work, particularly for European expats drawn to the dynamism of China that is missing at home.

But the territory is grappling with a host of problems – everything from poor air quality and sky-high property prices to a growing gap between rich and poor – that pose challenges for its competitiveness. “People open to an international move tend to be black or white on coming to Hong Kong,” says Richard Boden, a senior headhunter at Heidrick & Struggles.

“They either say ‘hell yes’ or say ‘no’ for a variety of reasons, mostly to do with flat size, a lack of school places and air quality.”

The labour market is also changing in ways that benefit some groups at the expense of others, and particularly professional locals who are having increasing trouble finding jobs with high enough salaries to pay the rent. “A lot of people say that in the most lucrative banking sector, Hong Kongers are losing jobs to the Zhangs and the Wangs who are US-educated, UK-educated, says Regina Ip, head of the New People’s party, referring to common surnames in mainland China. “There’s a sense of being encroached on, losing competitiveness – almost a rising identity crisis.”

Alex Trott, a managing director at the consultancy Accenture, says that western expatriates who do not have mainland China Rolodexes are also facing more competition in Hong Kong, although he believes there are still not enough mainland Chinese with the experience that US and European financial institutions demand.

Hong Kong is also facing headwinds from the relative economic slowdown in China, which has hurt trade – a huge component of the territory’s economy – and financial deal flows.

The territory cemented its reputation as a key financial centre for China-related deals in 2009 when it jumped to the top of the global league tables for initial public offerings, propelled by the flotation of Chinese companies. But it lost the crown in 2012, and is struggling to win it back, which has partly deflated optimism. Alibaba, the Chinese ecommerce group, recently said it might take its $60bn-plus IPO to New York, because Hong Kong would not allow it to list with the ownership structure it wanted.

Hong Kong officials have made it clear they will not change the rules for one company, but in a sign that the territory is starting to worry about losing out, Mr Tsang and Charles Li, the head of the stock exchange, have both recently said that Hong Kong should have a serious conversation about whether its listing rules need to be changed.

One area where the city hopes to remain dominant is in the offshore renminbi trading and deposit market.

While other financial centres such as London and Singapore have recently announced deals with Beijing that make them more competitive – by boosting their ability to reinvest renminbi into assets in mainland China – experts say Hong Kong does not face a serious threat now, since it remains the key financial gateway between China and the world.

But Ms Ip stresses that while Hong Kong may not face an immediate challenge, it cannot afford complacency. She says that while foreign companies think the city is a “great place to do business”, they do worry whether the territory can remain competitive in the long term with China’s rise.

“Clearly, China is trying to clone more IFCs [international financial centres], and we can’t blame them for that,” says Ms Ip. “It’s a big country; they can’t have just one Hong Kong.”

Hong Kong is also having to consider other factors related to the rise of China, such as whether it maintains the 30-year old currency system that pegs its currency to the US dollar.

Some experts, including Joseph Yam, former head of the Hong Kong Monetary Authority, have suggested that the territory peg its currency to the renminbi because of the increased economic integration with the mainland.

Hong Kong is also gearing up for its biggest political challenge since the former British colony was handed back to China in 1997.

As part of the handover agreement, Beijing has promised to give Hong Kong’s 7.1m citizens the right to elect their chief executive – who since handover has been chosen by roughly 1,200 well-connected business and political leaders – by 2017.

CY Leung, the current chief executive, and his team have come under criticism for not acting more quickly to start the constitutional change.

A group called Occupy Central plans to hold mass demonstrations next summer to try to force an outcome where Beijing does not have the ability to vet the slate of candidates.

Mr Tsang argues that while multinationals may have views on the issue, they are not preoccupied with the constitutional debate, saying, “businesses are a lot more concerned about the bottom line”.

But Ms Ip says foreign companies are worried that the protest movement could damage the territory’s reputation for stability. Asked why Hong Kong would suffer, given that its protests are generally among the most peaceful in the world, she says young people are increasingly angry about property prices, particularly as the gap between the rich and poor widens.

“Hong Kong is really an oasis of law and order compared with many parts of the world … If we damage that, we destroy our business opportunities.”