Asia Pacific  

Hong Kong: a market divided

Hong Kong: a market divided
 AP/Vincent Yu

The year 2020 will no doubt be remembered as the year the coronavirus pandemic brought the global economy to a standstill.

The uncertainty surrounding the long-term implications of the health crisis has made some investors worried, resulting in volatile trading conditions. 

Naturally, Covid-19 will continue to influence investment decisions and portfolio management for many months yet.

Key Points

  • Hong Kong’s alignment with China could have an impact on the UK investment scene
  • Some Hong Kong residents are looking to invest abroad
  • Hong Kong will remain a financial centre

However, it is important not to let the pandemic overshadow unfolding geopolitical events that are radically transforming the way investors structure their wealth portfolios. The 2020 US presidential election and ongoing trade war between the US and China are two particular trends that come to mind.

But there is another event that could have a notable impact on the UK’s investment landscape in the coming months: Hong Kong’s progressive alignment with China and the civil unrest this has caused.

Simmering tensions brought to the boil

Ever since Britain handed over Hong Kong to China in 1997, a rift has formed between those in favour of democratic reform and autonomous governance, and those who support Hong Kong’s alignment with Beijing.

This simmering tension usually boils over into mass public demonstrations, which are eventually quelled.

The current situation in Hong Kong is different from past periods of civil unrest.

Protests first started in reaction to proposed amendments to a now-abandoned extradition bill touted by the Legislative Council of Hong Kong in March 2019, and then snowballed into a wider movement.

Since the introduction of a new security law, protests against the Legislative Council have come to a sudden halt.

What some have criticised as draconian measures put in place in July 2020 have been viewed as Hong Kong’s symbolic submission to China. However, there are now concerns that protestors will find new ways of making their voices heard.

A gateway under threat?

Hong Kong has been traditionally referred to as a ‘gateway to Asia’. This means the jurisdiction boasts close ties to established and emerging markets in the region.

It also has in place a legal framework that is accommodating to international businesses and non-resident investors. As a result, there are more than 1,500 international companies that have their regional headquarters in Hong Kong.

The big concern is whether mounting instability will undermine the long-term viability of Hong Kong as a base within the Far East, which has been having a notable economic impact on the city state for over a year. In Q2 2019, Hong Kong officially slipped into a recession; foreign direct investment fell by 47 per cent in 2019 to HK$55bn (£5.6bn).

If we look back to the handover in 1997, there was a noticeable flight of international and domestic capital to other markets during the transition period.

There is no exact figure on this, but an analysis using the hot money method estimates Hong Kong’s capital flight totalled $29.2bn between 1998 and 1999.