Will the Hong Kong dollar still be around in 2047? Photo: SCMP Pictures
by Neil Newman
by Neil Newman

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?


To say that Hong Kong faces troubled times would be an understatement. Everyone is unsettled, whether pro-Beijing or pro-democracy, impoverished student or successful businessman. With mainland China asserting more control over the city, expats and locals alike are thinking of packing up and relocating.

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 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.

When I was a kid in the United Kingdom, Hong Kong was Britain’s manufacturing powerhouse in Asia. We played with toys made here, we wore clothes made here, and affordable shoes, pots, pans and any number of useful plastic household items had “Made in Hong Kong” stamped on them. There used to be a thriving shipbuilding business – the evidence of which is still with us as the Star Ferry chugs across the harbour. The more comfortable and zippy modern ferries that run other routes hail from Singapore.
The Star Ferry: a reminder of Hong Kong’s shipbuilding past. Photo: SCMP Pictures
In the 1980s, Hong Kong’s manufacturing shifted to higher-end and more sophisticated goods like electronics, watches and cameras, while the low-end manufacturing went north across the border. Sometime during the 1990s, the rest of Hong Kong’s manufacturing followed suit, and the city ended up mostly moving money around and consuming goods and services. Hong Kong’s importance as a major financial hub grew, and as the city was handed over to China in 1997 it became a useful way for mainland China to tap US dollars.
With the exception of the 2008 Global Financial Crisis, Hong Kong’s gross domestic product has gone up in a straight line since the 2003 Sars outbreak, to make the city a financial powerhouse today. For a brief period, Hong Kong had the second-largest equity market cap of any developed market, after the United States. But 2019 saw signs of the growth tailing off, and this year the economy is likely to contract. At the same time, since 2003 China’s growth has substantially eclipsed that of Hong Kong, so despite the significant contribution Hong Kong makes to the overall GDP of China, in percentage terms it has fallen dramatically.


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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China has strived to make its currency more useful internationally, and recently the government introduced an electronic version: the e-RMB. But sceptics of the renminbi and those worried about the safety of Chinese assets continue to move money out of the country, and much of it through Hong Kong. At times they can be very creative, using copper trading, insurance policies, credit card transfers and even diamond-encrusted Rolex swap trades in Macau to shift value out. Each time a new scheme is invented, the government swoops in to stop it. But where there’s a will, there’s a way, so as long as concerns linger about keeping money in China and as long as Hong Kong stays open, money will find a way out.

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.


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.

For monies that came in from unknown origins, the US, Japan and Hong Kong top the table – remember this is absolute dollars, not dollars per capita. These funds could have gone through many connections in global markets. For monies that have disappeared to an unknown destination, China is at the top of the table, followed by Germany and France. For China, we can make a good guess about where most of it went: through its gateway to global markets, Hong Kong.

Since the Global Financial Crisis, the annual amount of vanishing cash has followed a worrying trend.

The IMF estimates that China’s GDP in 2019 was US$14.14 trillion, of which 1.4 per cent went out the door based on the E&OE figures. In Hong Kong, the 2019 GDP is estimated at US$372.989 billion, which by the same measure means that 2.3 per cent of Hong Kong’s GDP mysteriously appeared.

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