A recent article written by the economist Stephen Roach in the Financial Times claimed that Hong Kong was “over”, stoking, once again, a heated debate about the territory’s future.

The criticisms outlined by Roach were valid to a certain extent, but not overwhelmingly so. Hong Kong is clearly shifting away from its prior role as an international financial centre geared largely to western business.

What Roach’s article ignored, though, is that Hong Kong is rapidly becoming “China’s financial centre”, and is also acting as a trade and finance intermediary for companies from India, Russia, the Middle East, and Southeast Asia. In doing so, the city is moving away from its prior focus on western links with China.

This seismic shift is not without its risks – but it has its compensations, too, and it will not be implemented overnight. Companies should thus not abandon Hong Kong outright, but rather should adapt to these changing circumstances, and seek out opportunities during the transition.

SVA can advise on how best to mitigate risk when doing so.

The criticisms

Stephen Roach pointed to three main reasons for the end of Hong Kong in his article, published in the Financial Times on 12 February 2024.

The first reason was the 2019 protests and riots, in response to which Beijing imposed a National Security Law (“NSL”) in mid-June 2020. Roach claimed that the law had “cut in half” the period prior to the full takeover of Hong Kong in 2047.

The second reason was that the Chinese economy had “hit a wall”, owing to debt arising from a property crisis, deflation, and a worsening demography. A steep decline in the local stock market has followed, down to levels last seen at the time of Hong Kong’s reversion to mainland China in 1997.

The third reason was the growing geopolitical rivalry between the US and China, and a related trend towards “friendshoring”, which had left Hong Kong deeply exposed.

One thing after another

These criticisms are all valid, if perhaps viewed through a particular lens. After all, Hong Kong has faced “one thing after another” in recent years – riots, COVID and, now, economic slump, and radical political change.

The protests and riots in 2019 and the passage of the NSL have certainly altered Hong Kong – and the forthcoming adoption of a new security law under Article 23 of Hong Kong’s Basic Law (its mini-constitution) will only add to the trend of closer alignment with mainland Chinese practices and priorities. This law will also almost certainly intensify western criticism of changes in Hong Kong.

Similarly, the ailing property market in China is undeniably dragging down growth in Hong Kong, and any new US administration seems almost certain to demand “de-risking” away from Chinese producers.

New US sanctions, perhaps in response to the Article 23 legislation, could further erode Hong Kong’s appeal to western businesses. After all, US scepticism towards Hong Kong shows no sign of diminishing, especially in this election year.

Even so, Hong Kong is not “over”. The China market cannot be ignored – and so Hong Kong remains of great importance. Such changes also take time, and Hong Kong retains much to commend it to international companies.

The Greater Bay Initiative – Hong Kong’s New Role

Perhaps more importantly, though, the city is undeniably on a new trajectory, “pivoting” from being a gateway to China for (mostly) western investors towards a new role as China’s financial centre.

In particular, Hong Kong is seen as a lynchpin of the Greater Bay Area (“GBA”) initiative, which seeks to integrate Hong Kong, Macau, Shenzhen and Guangdong province, so as to engender scale and specialisation.

Within the region, Hong Kong retains a pre-eminent role as a financial centre, thanks to its expertise, its deep capital markets, and, most importantly, the freely tradeable nature of its dollar – the only such arrangement in China. Its prospects have shifted.

A new clientele?

Equally, just as many western expatriates are leaving the city, Hong Kong is now drawing in those from the Middle East, Southeast Asia, India and Russia. Hong Kong can offer companies from these states a low tax base, a sophisticated financial system and a clear legal basis for structuring investments or settling disputes.

Hong Kong, then, is effectively shifting towards a focus on firms on the fringes of, or even outside, US ascendancy. Notably, the first overseas trip of Hong Kong’s Chief Executive, John Lee Ka Chiu, was to Saudi Arabia.

Companies from places such as India and Indonesia may be “agnostic” of western sanctions – and in the case of those from Russia may actively want to circumvent such measures. Either way, they will be less deterred from coming to Hong Kong than are their western counterparts.

Of further importance is that the emergence of a financial ecosystem less subject to US interference is in China’s interests, given its desire to protect itself in the event of a Taiwan conflict. It is also in line with broader trends of the “rise of the rest” in the global economy.

Such business may not yet be as profitable as that dealing with western financial companies – but it is, again, not without its compensations, and the returns will grow in time.

What to do

Stephen Roach’s criticisms are valid, then, but they are incomplete, and dated. Hong Kong is not “over”, but rather has shifted onto a new trajectory – and will likely continue on this path for the foreseeable future.

International companies should not up sticks and flee. Instead, they should make adjustments taking account of this change in trajectory, and so protect their interests. Key measures to consider might include:

Companies should carry out independent strategic appraisals, so as to gain a firm understanding of any threats and vulnerabilities in terms of operating from Hong Kong. Such assessments should consider geopolitical risks, of high- and low- order, alongside commercial and more workaday concerns, and ask what structural or operational changes to make in response. SVA are specialists in these areas and more, as below.

Boards will need to act to ensure that existing compliance regimes are fit for purpose, and should bolster them if in doubt. Such regimes should be sculpted to cope with somewhat conflicting demands from various jurisdictions. Independent advice is appropriate in such circumstances.

Companies should reappraise prior due diligence work. Decisions may have been made in a time of easy money, market optimism, and under a now outdated perspective. Boards will need to take particular note of accounts or clients brought in through acquisitions, as relying on others’ assessments would be especially risky.

Regulatory risks will require much closer attention, as investors can no longer assume supervisors will always act in accord with principles previously seen as generally accepted. Risks may also manifest themselves in a range of unexpected areas, such as data management or accounting standards.

Companies must take careful action in relation to sanctions issues. Reliance on a “list-based approach” may not provide adequate protection. Rather, companies will need to appraise risks on an industry or geographical basis, or on the basis of the technology in question, and perhaps ringfence issues accordingly.

Companies might consider whether to sever key operations in Hong Kong from global business structures, with attention to corporate vehicles, finance, treasury, IT, data management, and other areas of operations. Such divisions could protect group interests as the paths of jurisdictions diverge. Flexibility and careful attention to detail are critical.

Companies should carefully assess trade-related risks, but should act cautiously in “de-risking”. Acting impetuously may prove harmful – a full understanding of the risks of leaving, and the risks lurking in the new destination, is essential. There is no point in jumping from the frying pan into the fire.

Ultimately, acting decisively is crucial. Once concerns are identified, companies should undertake a thorough appraisal, report findings in full, and take the measures necessary to protect interests quickly. Those who bury their heads in the sand will only leave problems to fester.

SVA

SVA (www.stevevickersassociates.com) is a specialist risk mitigation, corporate intelligence and risk consulting company. The firm serves financial institutions, private equity funds, corporations, high net-worth individuals and insurance companies and underwriters around the world.

We can be of any assistance to your organisation in dealing with these complicated issues. If you wish to protect your business from the negative consequence of fraud or other financial crimes, please do not hesitate to contact us at the numbers below.