Hong Kong's competitive advantage still strong

Role of Hong Kong in global financial market will only increase as gravity of wealth creation shifts to Asia

The United States recently announced a series of sanction measures against Hong Kong in response to China's legislation on safeguarding national security in the special administrative region. The US president has announced the ending of preferential treatment for Hong Kong, including the availability of export license exceptions. The US will impose export restrictions on its defense and dual-use technologies to Hong Kong as it does for the Chinese mainland. The US has also passed a law to impose economic sanctions on foreign individuals, entities, and financial institutions over Hong Kong issues.

These measures represent not only the attempts of politicians in the US to interfere in China's internal affairs, but also their failure to understand China's determination to defend its own sovereignty and national interests. As stated in Article 1 of Hong Kong's Basic Law, the special administrative region is an inalienable part of the People's Republic of China. No amount of external threats and sanctions will stand in the way of China protecting its sovereignty and territorial integrity.

While the current sanction measures of the US may have brought about some market uncertainty and concerns, their actual impact on Hong Kong's economy will be very limited. In 2019, Hong Kong's exports to the US accounted for only 7.6 percent of its total exports, while its exports to the Chinese mainland accounted for 55.4 percent. The majority of Hong Kong's merchandise exports are actually re-exports of goods manufactured outside Hong Kong. Locally manufactured goods exported to the US account for less than 2 percent of Hong Kong's local manufacturing and less than 0.1 percent of its total exports value. Besides, it has never been easy for China to import defense and dual-use technologies from the US via Hong Kong.

Therefore, the US' ending of preferential trade treatment for Hong Kong will have only a limited impact on Hong Kong's trade pattern. As the Chinese economy continues to grow and further opens up, the foundation for Hong Kong's trade growth remains solid.

Hong Kong is also in a strong position to defend the stability of its financial system. It has over $445 billion in foreign currency reserve assets, representing over six times the currency in circulation in Hong Kong, and is further backed by the currency swap arrangements with the People's Bank of China through which additional US dollars can be provided if needed. Despite the threat of the US sanctions, the HK dollar exchange rate has remained stable and on the strong side of the convertibility zone. Meanwhile, Hong Kong's banking system is robust and well capitalized, with ample liquidity and healthy asset quality to withstand potential shocks.

The US government's sanctions against Hong Kong are not consistent with the commercial interests of US companies and financial institutions operating in Hong Kong and the Chinese mainland. They are also not helpful in maintaining regional stability and cooperation in the Asia-Pacific. Given the scale and complex interdependency of the US-China trade and financial linkages, the US cannot further escalate sanctions without substantially backfiring on its own interests and credibility.

In particular, Hong Kong's financial system is deeply integrated with global financial markets. According to the latest survey of the Bank for International Settlements, Hong Kong ranked as the fourth-largest global foreign exchange market in 2019, with the average daily turnover of foreign exchange transactions in Hong Kong increasing by 44.8 percent from $436.6 billion in April 2016 to $632.1 billion in April 2019, accounting for 7.6 percent of global foreign exchange turnover. With the HK dollar against US dollar, the most heavily traded currency pair. Hong Kong is a major US dollar trading center serving numerous global companies and investors. It would be highly destructive for global financial markets if the US government were to launch a "currency war" to attack the trading and clearing channels between HK dollar and US dollar, which would also profoundly undermine the credibility of the US dollar as an international reserve currency.

The strong growth of China's corporate sector will continue to stimulate and sustain the development of Hong Kong's capital markets and financial services industry. At the end of 2019, there were a total of 1,241 mainland companies listed on the Hong Kong Stock Exchange, accounting for 51 percent of the total number and 73 percent of the total market capitalization. Among them, 114 mainland companies were newly listed in Hong Kong in 2019, raising HK$256 billion ($33 billion) in equity funding through initial public offerings (IPOs), which accounted for 82 percent of the total annual IPO funds raised in Hong Kong. As the US restricts the access of Chinese companies to the US capital market, many mainland companies will shift their listings to Hong Kong where international investors can continue to invest.

Hong Kong's status as a global financial center and business hub is built on its competitive advantage in providing a world-class business environment and infrastructure to efficiently and prudently connect the Chinese mainland's rapidly growing market with the rest of the world. Its resilience comes from the evolutionary process of institution building over the long term and reflects the commercial logic of global market development and selection.

With the national security legislation closing the loopholes in Hong Kong's legal system, Hong Kong is now in a more effective position to restore sociopolitical stability and to further improve the local business environment and the people's living standards. As the engine of global growth and wealth creation shifts toward Asia in an increasingly multipolar world order, the strategic role of Hong Kong in the global financial market will increase rather than decline.

The author is an assistant professor at the Centre for China Studies and Lau Chor Tak Institute of Global Economics and Finance at the Chinese University of Hong Kong.