Asia PacificOct 6 2020

Hong Kong: a market divided

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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.

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

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.

Twenty-three years on, are we likely to see a similar exodus of wealth from Hong Kong should civil unrest continue?

At the moment, it is difficult to tell. Nonetheless, if we look at recent foreign direct investment flows into the UK during 2020, it looks as though some Hong Kong residents are already looking abroad and considering stable market alternatives.

A stable market alternative

The UK is a popular destination for Hong Kong investors and businesses looking to stable international markets. This is because of their long-established relationships and the range of investment opportunities on offer.

In 2017 for example, it was estimated that Hong Kong companies alone invested more than US$8bn (£6.3bn) into the UK, the majority of which went into Britain’s property sector.

Commercial and residential real estate, particularly prime property, is extremely popular for Hong Kong investors.

This is because of the capital growth it can offer, as well as being based in a stable market fuelled by consistently strong buyer demand. Interestingly, even with the disruption caused by Covid-19, there has been a noticeable increase in Hong Kong investment into UK property in 2020.

Luxury agents Beauchamp Estates sold £300m worth of prime properties to Hong Kong residents in the first six months of 2020. Knight Frank has also revealed that Hong Kong buyers have become the fifth largest foreign investor in central London in August 2020, responsible for 4 per cent of purchases. This is up from 2.5 per cent in August 2016.

Part of the reason why Hong Kong investors are flocking to real estate has to do with the tax incentives the government has introduced to support property investment.

At the moment, non-UK residents (like domestic buyers) can take advantage of a stamp duty land tax holiday, which could result in savings of up to £15,000. With the holiday in place until the end of March 2021, it makes sense for Hong Kong residents to make a pre-emptive decision and direct some of their wealth into UK property to minimise their risk exposure.

Global financial capital

All that being said, we should by no means write off Hong Kong’s position as a global financial centre. Even with a closer alignment to China, the Hang Seng Index has already made a 14 per cent recovery from its March low.

While it is still 9 per cent off its peak value recorded in 2018, the fact there have been heavy capital inflows from China’s mainland institutions demonstrates that Beijing also wants to maintain Hong Kong’s position as a gateway between the West and Asia.

Ultimately, the decision to remain invested in Hong Kong or to diversify to international markets like the UK will be determined by the individual circumstances of investors and wealth managers.

Nir Sadeh is senior vice-president and head of private banking at The Bank of NT Butterfield & Son