Hong Kong is stuck in a quagmire of its own making
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Hong Kong is stuck in a quagmire of its own making

Hong Kong’s capital markets are moribund, its government erratic and directionless, and its economy in disarray. For a city that increasingly looks like anything but Asia’s ‘world city’ is there a route back to normality?

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For nearly two and a half years white-collar workers in Hong Kong have been stuck – or if you like, cocooned – in place. “We’re trapped in 2020,” a senior investment banker recently lamented.

That’s not quite true, even if it feels true. The financial hub’s fortunes have both waxed and waned since the pandemic claimed its first local infection in January of that year.

Hong Kong actually had a pretty good 2020, with 431,000 more people arriving than leaving, according to the immigration department. At first, it let people quarantine at home and its capital markets thrived.

In 2019, 160 companies completed initial public offerings, raising $40.3 billion, according to Dealogic. In 2020 that number jumped to $51.6 billion from 145 new stock listings.

The financial hub’s fortunes have both waxed and waned since the pandemic claimed its first local infection

But then it all went terribly wrong. Two weeks’ quarantine became three but in the less salubrious confines of a hotel. This writer has somehow endured an experience that surely only claustrophiles would embrace not once but twice.

So the tourists and business travellers stayed away – and many working there began to search for the exit.

In 2021, 30,768 more people left than arrived. In the current year to June 27, that number is over 134,000. Exasperated citizens despair of a government that issues HK$5,000 ($637) on-the-spot fines, threatens to separate children from parents and refuses to open its borders, all in the name of an unworkable ‘zero-Covid’ policy.

Such autocratic measures breed discontent. The number taking flight will only rise as salaried workers leave for summer vacations. Some will not return.

Financial middleman

If this was anywhere else, it wouldn’t matter. But Hong Kong’s proud claim of being Asia’s ‘world city’ disguises the fact of what it actually is, a financial hub.

Pre-Covid, plenty of people came here to visit from the likes of London, New York and Shanghai. Many sought out louche nightlife and shopping, but most trips were financial in nature. Investors, western and Chinese, met in a city that is essentially a well-placed financial middleman.

Hong Kong’s new broom does not herald sweeping change

On July 1, Hong Kong celebrates the 25th anniversary of the former British colony’s return to Chinese rule. President Xi Jinping is expected to attend the event, at which John Lee will be named the city’s next chief executive, replacing outgoing leader Carrie Lam.

Who is John Lee and what does his appointment mean for those living and investing in a city that, while isolated from the world, remains Asia’s premier financial centre?

Lee is often called a ‘hardliner’ and for good reason. As security secretary between for four years, he led the crackdown on rioters protesting against a bill tabled in 2019 permitting the extradition of citizens to mainland China. When the designation was put to him on June 23 by a Hong Kong reporter he leaned in, responding: “I describe myself as a pragmatic person. What needs to be done will be done.”

The implication isn’t hard to grasp.

The interview was a chance for the sombre 64-year old to remind the world that Hong Kong is still open for business. He was briefly game, confirming his attendance at the Asia-Pacific Economic Cooperation meeting of leaders in Bangkok in November and claiming the city was a place where people could still “come and realize their dreams and potential”.

Asked about perceptions that freedoms Hong Kongers once enjoyed were being eroded, he hit back, claiming the city was the 19th freest place, noting: “A lot of [western] countries including the US are behind us.”

He added: “I want my officials, myself, and delegations from Hong Kong to go out and tell people: ‘Yes, there are fear-mongers. They tell you stories which by repetition, even though untrue, seems to be the true situation.’”

It’s not clear what source Lee used here. The Cato Institute’s Human Freedom Index, which offers a broad measure of economic and political liberty, ranks Hong Kong 30th, ahead of France and South Korea but behind the US in 15th place. The Washington-based Freedom House brackets Hong Kong as a ‘partly free’ territory, scoring it 10 out of 100 in political rights and 33 in civil liberties. No big western country ranks lower.

Lee had no message for bankers and investors irate at being stuck in or unable to visit the isolated city, admitting only that draconian quarantine measures caused “inconvenience to travellers”.

Asked if he had a battle plan to revive the city’s battered reputation, he replied: “We have to go on the offensive. Despite all the challenges and attacks, we still face up to the challenges of telling people about the opportunities.”

With his dark suits and careful turn of phrase, Lee sounds like a cookie-cutter Party mandarin – because he is. What his appointment means to global investors, who view Hong Kong as the gateway to China and hope it will emerge from self-imposed isolation with a renewed sense of purpose, remains to be seen.

But for too long now its primary purpose as a meeting ground for money generated in now diametrically opposed political cultures has all but ceased to exist.

Hong Kong’s economy shrank by 4% year on year in the first quarter of 2022. Its capital markets have all but seized up. Just $2.44 billion was raised in the current year to June 27 through new listings, against $27.8 billion in the same period a year ago.

On June 24, Ximalaya became the latest Chinese firm to shelve plans to sell shares in the city. The Tencent-backed podcasting platform had hoped to raise up to $100 million.

Every few weeks an influential financial figure begs Hong Kong’s authorities to welcome the world back in. On June 14, the chief executive of the Hong Kong Investment Funds Association, Sally Wong, warned Hong Kong’s outgoing leader, Carrie Lam, of a “permanent” loss of financial talent.

Lam turned a deaf ear, pledging once again to focus on reopening its borders with mainland China first.

Not all of this is Hong Kong’s fault. Lam is not popular. In the latest polling by Hong Kong’s Public Opinion Research Institute to June 5, just 36% of people approved of her performance in office. That number has not been above the 40% mark since her administration tabled a 2019 bill to allow extraditions of citizens to mainland China, sparking riots.

A leaked audio recording later emerged, in which Lam admitted she would quit as chief executive if she had “a choice”, the implication being that her hands were tied with Beijing pulling the strings.

That is undeniably true. Officially, ‘one country, two systems’, a half-way-house formula of government applied to Hong Kong since 1997, is still in place. But no one really believes that. Even before the pandemic, Beijing was tightening its grip on the city. When it imposed a controversial national security law in 2020 and began arresting journalists, pro-democracy politicians and even retired bishops, that grip became a noose.

John Lee, who takes over from Carrie Lam on July 1, has indicated no desire to open Hong Kong’s borders in the near term. Gently probed on the issue in a June 23 interview, Lee replied: “The first thing I need to do is to talk to [Beijing], so they can tell me the conditions for normal travel resumption.”

Ximalaya’s decision to delay was due to investors fearing a new crackdown on tech firms by Beijing. Volumes are down in many markets for the same set of reasons: inflation, Ukraine and recession fears. “Investors everywhere are risk-off and I don’t blame them,” says a senior Hong Kong banker. “Entrepreneurs want to be paid 12 times revenues and the market is willing to pay four.”

But it’s notable that in a year when IPO volumes have slumped to near-record lows in Hong Kong, just across the border, they have soared. Funds raised from IPOs in mainland China topped $35 billion in the year to June 27, according to Dealogic.


There is a route back to normality and sanity for Hong Kong.

For one thing, once its capital markets regain momentum, they are likely to be, for a while at least, pretty much unstoppable. Bankers in the city boast about the record size of their pipelines. They often do of course, but on this occasion the crowing may bejustified.

For another, once you look beyond the political sphere, there are signs of life.

Hong Kong Monetary Authority chief executive Eddie Yue is certainly giving positive signals. He has outlined plans to hold a major financial summit in the city, to be attended – he hopes – by global bank chiefs. However, that will not happen until November, begging the question: why not now?

Until then, the city is stuck, and in a quagmire of its own making.

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