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Shanghai will quietly become a hub for global banks. Photo: EPA
Opinion
The View
by Peter Guy
The View
by Peter Guy

Hong Kong's future as financial hub under threat from mainland China

Hong Kong will have to reinvent itself again because it underestimated mainland's ability to evolve

Hong Kong's demise as a major international financial centre will not come with a bang or a whimper, but with the stroke of a pen. Economic and financial forces have been set in motion that will dramatically, but quietly, shift the operations and focus of international banks and asset managers to Beijing or Shanghai. And it will occur far faster than most people could have anticipated.

Alipay's runaway success is being cited by almost every major financial firm as proof of the massive potential demand for asset management services from institutions and individuals. Alipay's new money market, Yu E Bao, attracted 2.5 million customers and raised 6.6 billion yuan (HK$8.3 billion) in its first 18 days, making it the mainland's most successful mutual fund debut.

And the mainland's 112 trillion yuan in deposits makes it one of the largest bank-deposit markets in the world.

The growing global importance of the mainland's consumers and corporations makes a convincing case to relocate financial headquarters from Hong Kong to Beijing or Shanghai.

While Hong Kong has prided itself as a financial gateway to China, that has also become the city's ultimate limitation. The mainland's growing demand for more sophisticated financial services makes it imperative to locate a foreign bank's headquarters in Beijing or Shanghai, not Hong Kong. Although Shanghai and Beijing are disadvantageous locations for conducting financial services outside of China, a bank's non-China operations in Southeast Asia can be effectively run through Singapore.

Hong Kong's rule of law is certainly important, but not absolutely essential for financial services. It is unlikely that the mainland can fully reckon its Communist Party-dominated legal system with a Western, independent judiciary. The vast banking market and the gradual opening of its capital account are attractive enough to compel Western banks to find a way to work within China's shortcomings.

Hong Kong has a reliable judiciary, but this only means that banks will keep a minor presence in the city in order to maintain a Western legal entity. The mainland's legal system is ill suited for litigating complex financial transactions, so this will probably require a large, dedicated, legal and compliance team based in Shanghai or Beijing.

Most bankers are reluctant to admit that if certain communications regarding a financial transaction with a mainland counterparty need to be kept confidential, it cannot be transmitted over voice, video, messaging or email platforms. This delicate situation applies to many banking areas like private wealth management and corporate finance. Travelling is no substitute for the convenience of a local office.

No announcements or headlines will occur when they migrate away from Hong Kong. Look for evidence like reduced hiring in Hong Kong and increased hiring for new mainland positions. Expatriates will be increasingly posted on the mainland rather than in Hong Kong.

Major western banks have never been particularly loyal to Hong Kong. In the early 1990s, Morgan Stanley completely pulled out of the city.

Hong Kong cannot capitalise on this trend because the government has neglected to develop its own, indigenous asset management industry. Singapore has cultivated home-grown investment management talent by establishing two sovereign wealth funds: Temasek, with US$173 billion and the Government of Singapore Investment Corp with US$330 billion. Both manage a variety of asset classes around the world.

Meanwhile, the Hong Kong Monetary Authority sits on a vast HK$3.03 trillion pile of assets, most of which are invested in US treasuries. If its bureaucrats had the foresight to play a role in seeding and building a strong local asset management industry, Hong Kong would be valuable to China's development.

Hong Kong will have to reinvent itself again because it has underestimated the mainland's ability to adapt and evolve. Ironically, perhaps Hong Kong could become more like Vancouver, where the absence of manufacturing, corporate and bank headquarters has resulted in a chronic shortage of good jobs. At the same time, the mainland's demand for property has made Vancouver an expensive place to buy a home, like Hong Kong.

Hong Kong continued to prosper as the mainland's financial service provider after losing all of its industry to the mainland. But Hong Kong's private and public sectors need to start planning today for a future without an international financial industry.

This article appeared in the South China Morning Post print edition as: Don't bank on the future
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