Hong Kong investors face uncertainty

If money makes the world go round, it certainly makes Hong Kong go round. Just look at the title held by the territory's governmental head, Carrie Lam. She's not the president or the governor — she's the Chief Executive, a title we might associate more with corporate life.

Hong Kong's 426-square-mile (1103-square-kilometer) area host's one of the world's most important financial centers. It is home to the largest concentration of the super-rich (those worth at least $30 million (€26.5 million)) in the world, and is an essential staging post for most of the world's biggest multinationals and financial services firms.

Understanding the essence of what makes Hong Kong tick helps partly explain how mass protests forced the territory's government to indefinitely suspend a controversial "Fugitives Bill," which would have allowed extradition of people to China and any other jurisdiction in the world with which Hong Kong has no existing agreement.

Business leaders in Hong Kong haven't always rowed in behind mass protests against China, but this time, it was clear how united the territory's financial and business community was in opposition to the proposed law.

When a citywide strike was called for by protestors last Wednesday, the accounting firms KPMG, EY, Deloitte and PwC allowed flexible work arrangements for staff, as did banks Standard Chartered and HSBC.

Several business groups and senior executives spoke out against the bill, although often anonymously. The volume of opposition is a reflection of how much business leaders felt was at stake. Several said that pushing through the bill could sharply undermine investor confidence — the very air which Hong Kong breathes.

"The credibility of Hong Kong is now on the line," Tara Joseph, president of the American Chamber of Commerce in the territory, said.

Singapore's siren song

The extradition bill is now apparently shelved for good, although protests are continuing. Bernard Chan, a key figure in the Hong Kong Executive Council, admitted during the maelstrom of protests that he and the government had underestimated the depth of business opposition to it.

But even though it looks like the protests have effectively killed the bill, how much damage has already been done to Hong Kong, both in terms of its image as one of the most business-friendly environments on the planet and in terms of capital that may have already been channeled out?

Hong Kong is already under pressure as it is. Earlier this week, figures from property consultancy Knight Frank showed that Singapore had overtaken its Asia-Pacific rival in cross-border commercial property investment outflows in the 12 months to Q1 2019. Hong Kong's property investment outflows has fallen by 37% since Q1 2018.

The Financial Times reports that at a dinner in May, a small group of Chinese business elites, now resident in Hong Kong, tried to convince Lam of the error of her ways regarding the extradition bill. One told her that Singapore officials were looking forward "to the day the extradition bill passes." 

Hong Kong's "real strength comes from the application of the law, from the rule of law. You do not go to prison for no reason. No one will close your business without reason and without you being able to defend yourself in court," the French boss of an investment company told the AFP news agency on condition of anonymity.

Although Hong Kong's special devolved status remains intact, the fear among investors is that the proposed extradition bill is the thin end of the wedge — that it could one day develop into wholesale Chinese interference which would dramatically change the conditions that have enabled Hong Kong to develop into the financial megacity that it is.

Money on the move?

Evidence that the protests and the concerns over Chinese interference have led to capital fleeing Hong Kong is still limited. It's a little too early to tell. But there are some indicators which analysts have pointed to.

The interbank borrowing rate, known as HIBOR, determines the cost at which banks in Hong Kong lend to each other. It rose to its highest level in more than a decade last week, suggesting a surging demand for cash.

Some analysts put the sharp increase in the rate down to the fact that banks were borrowing more to cover potential capital outflows.

"Recent political events in Hong Kong are affecting investors' confidence on the future of the city," Springwaters Financial Securities Ltd. Hong Kong-based strategist Sam Chi Yung told Bloomberg. "Surging HIBORs mean higher funding costs for companies with more debt."

The 2047 problem

Hong Kong's financial markets also took a bit of a hit in the wake of the crisis, with the Hang Seng Index falling for three days in a row last week. Yet considering the scale of the protests, the impact was quite limited. In fact, the index actually rose overall last week by 0.5% — hardly evidence of turmoil.

That pointed toward an overall sense that the fears in Hong Kong's financial and business community are still more based on anecdotal examples and issues of lagging investor confidence, rather than anything more concrete. Or, to use a financial term, liquid.

But that doesn't mean the situation isn't serious or that uncertainty over the precise nature of China's role in Hong Kong is going to dissipate anytime soon.

Hong Kong's "one country, two systems" framework with China, agreed after the territory was returned from British control in 1997, literally has an expiry date — the year 2047.

If the cliche that Chinese leaders think in terms of centuries rather than decades is even remotely true, then 28 years must appear quite close on the horizon right now in Beijing. Those investor jitters are unlikely to be tranquilized anytime soon.