Spotlight falls on Hong Kong's strengths and weaknesses

While mainland ties have served city well, rivals are keen to move in, Asian Financial Forum told

PUBLISHED : Wednesday, 15 January, 2014, 1:38am
UPDATED : Wednesday, 15 January, 2014, 1:38am

Day two of the Asian Financial Forum focused on Hong Kong's strengths and weaknesses as a financial services provider. This largely dwelled on how the city benefits from its relationship with the mainland, and the risks of losing its edge to competitors such as Shanghai.

The chairman of the Hong Kong unit of China Investment Corp, China's US$575 billion sovereign wealth fund, encouraged Hong Kong to diversify away from the mainland. Lawrence Lau Juen-yee, chairman of CIC International (Hong Kong), said the city's exchange should list more regional stocks and beef up issuance of offshore yuan bonds from Southeast Asian firms.

"I've always advocated that Hong Kong list regional stocks, so people sitting in Hong Kong can easily buy the constituent stocks in the MSCI index," Lau said.

He said the city should bring in more issuers from Southeast Asia to raise capital in yuan, given that many of these countries had a trade surplus with China, and thus had excess yuan. "Hong Kong and Shanghai should play different roles, with Hong Kong functioning as a capital-raising hub for the region," Lau said.

Xiao Geng, vice-president of research at think tank the Fung Global Institute, said Hong Kong should do more to position itself as a gatekeeper for capital flows between China and the 10-member Association of Southeast Asian Nations. "Hong Kong can do a lot by basically integrating Asean into China," Xiao said.

Hong Kong can do a lot by basically integrating Asean into China

Two-way trade between China and Asean in 2011 was US$280 billion and is expected to reach US$1 trillion by 2020, according to Ngurah Swajaya, the Indonesian ambassador to Asean. Chinese firms were being lured by Asean's low-cost labour and growing middle class, he said.

Alexa Lam, deputy chief executive of the Securities and Futures Commission, said Hong Kong derives many benefits from its relationship with the mainland, such as its position as an offshore hub for yuan trading, and as the first market let into the renminbi qualified institutional investor (RQFII) scheme.

At yesterday's forum, she emphasised the plan for "mutual recognition" of funds between the mainland and Hong Kong, which would give local asset managers the right to sell funds to the mainland's 1.3 billion potential investors.

"We are in the final stretch of the project [mutual recognition] … we have reached broad agreement on several very key areas," Lam said. This included the scope of the project, the type of funds that would initially be chosen for the programme, eligibility requirements, disclosure and investor protection.

Lieven Debruyne, chief executive of Asia Pacific Schroder Investment Management, said mutual recognition would be a "game changer" for Hong Kong. However, he questioned whether this would be a long-term advantage for the city, or whether international funds would next be allowed to sell into mainland China - without a need to base themselves in Hong Kong. "We are waiting for clarification on just how unique Hong Kong will be," Debruyne said.

Hong Kong is serving as a base for international asset managers looking to break into the mainland market, and for mainland firms expanding offshore. This has been most concretely seen by mainland institutions expanding into Hong Kong to take advantage of the RQFII scheme, which lets Hong Kong units of mainland institutions sell funds to offshore investors.

"For the past five years, we have seen a lot of outstanding Chinese asset management firms set up offices in Hong Kong," said Ding Chen, chief executive of CSOP Asset Management, one of the beneficiaries of that scheme.

Mark Machin, a senior vice-president at the Canada Pension Plan Investment Board, with net assets of C$188.9 billion (HK$1.34 trillion), said the board chose Hong Kong as its first point of expansion outside Canada.

He said this was due to the city's strong rule of law, access to mainland China and Asia, and availability of talent. The board targets investments in China, India, Australia and Japan.