
Troubled Hong Kong, China’s gateway to markets, could prove too costly
- Chinese money slips out through Hong Kong while the SAR shrinks as a piece of China’s GDP pie
- As long as the city remains open it will continue to be the pipeline to the dollar. How long before Beijing fixes the plumbing?
MONEY, MONEY, MONEY
Foreign governments are also starting to shift assets, as evidenced by the Americans putting their inventory of consulate staff quarters on the market. Then there are the Chinese investors who moved money out of mainland China and invested in Hong Kong, and who now worry about whether their investment is safe.
This is resulting in long-term net outflows of money from Hong Kong. Given that Hong Kong contains little more than cash, an easily accessible stock market that attracts short-term “hot money”, property and a dwindling port (the factories are long gone) – all assets which can be easily liquidated or shut down – the value can be easily transferred. Hong Kong residents aren’t as sticky as they used to be.
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HONG KONG – THAT CLINKING CLANKING SOUND
Hong Kong has regularly gone through transformations. Through colonialism and wars, economic boom times and property busts, its people have proven to be resilient and adaptive. Another period of change is clearly afoot.

MONEY, THAT’S WHAT I WANT
In the few years leading up to 1997, when Hong Kong was returned to China, the territory’s GDP was equivalent to about a quarter of China’s GDP – where it peaked. Since then, that figure has shrunk progressively to around 2.6 per cent in 2019. Hong Kong expects its economy to shrink by 7 per cent this year, and although the Chinese government has not set a GDP target, investment bank China International Capital Corporation estimates growth of 2.3 per cent. That allows me to guesstimate that Hong Kong’s contribution this year will end up around 2.4 per cent, a record low.
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I HAVE TO LEAVE, I HAVE TO GO …
Just how bad is it? Clues can be found in some handy figures published online by the International Monetary Fund (IMF): the balance of payments data by country.
NET ERRORS AND OMISSIONS
In the balance of payments statistics published by the IMF, there is a line called “Net Errors and Omissions”, or E&OE. These reflect the “imbalances resulting from imperfections in source data” – in other words, money that has gone out or come in, but they are not sure where to or from. It is a little like thinking you dropped a 100-dollar bill at the ferry pier after a few glasses of wine and then finding one in your jacket pocket two weeks later – you are just not sure what happened due to the quality of the sauce.
Filtering the data for the top five economies with the greatest absolute numbers in the E&OE data set, in equivalent US dollars, the net inflows and outflows are revealing.
Since the Global Financial Crisis, the annual amount of vanishing cash has followed a worrying trend.
How the latest transformation of Hong Kong will take shape is anybody’s guess, especially with many people threatening to leave. These are undoubtedly unsettling times. Yet we will survive, and can only hope that the Special Administrative Region (SAR) and the Hong Kong dollar remain at least until 2047, if not beyond. But from China’s perspective, the outflow of money by the bucketful through Hong Kong is bound to be a negative mark in the city’s report card. If the trend continues, at some point it will cost China more money to keep Hong Kong as an SAR than the city contributes in return. ■
Neil Newman is a thematic portfolio strategist focused on pan-Asian equity markets
