As the political temperature in Hong Kong reaches boiling point, investors need to be aware of what's at stake. The ethical dilemmas for many companies are painfully real, and the ramifications for stock markets could be enormous. Is this the end of Hong Kong as China's window on the world? What are China’s rulers thinking?
Police raids on newspapers are never a good look. Last Monday they stormed Hong Kong’s most-read newspaper, Apple Daily, and rounded up nine people including owner Jimmy Lai, keeping journalists from their desks while they filled 25 boxes with documents for “further investigation.”
China has a long history of suppressing free speech. It arrested 48 journalists last year alone, on Orwellian charges that bear little resemblance to the truth, and hundreds in the last decade. Take Chen Jieren, who ran an anti-corruption blog, given 15 years recently for “picking quarrels and provoking trouble.” But up until now such arrests were confined to mainland China.
This doesn’t mean China hasn’t sought to crush dissent in Hong Kong before, but it has done so clandestinely: kidnapping journos. Consider the infamous disappearance of the five people who ran the Causeway bookstore. One of them, Gui Minhai, eventually emerged in China “plagued by guilt and shame” over an old traffic offence. Under the cover of Covid he was recently sentenced to ten years in jail for “illegally providing intelligence abroad.” Of course nothing to do with the book he was working on – “The Six Women of President Xi.”
Jimmy Lai’s arrest sets alarm bells ringing. China acting openly now shows how important the introduction of Hong Kong’s new Security Law in June was, and exposes its claim it would be “rarely used”, and only for cases of “terrorism”, as a big lie. A new police force, “Action Arm,” has arrested at least 30 people, and schools and libraries are being told to remove subversive texts from shelves. No doubt “The Six Women of President Xi” among them.
International condemnation of the new Security Law was swift. The UK reacted by offering Hong Kongers British residency – infuriating China. US relations also deteriorated further, beyond the trade war, and the highly politicized fights over Huawei, WeChat and TikTok. The US imposed sanctions on 11 Hong Kong politicians and ended Hong Kong’s special trading status with President Trump suggesting “its markets will go to hell.”
US customs declared imports from Hong Kong must now be labelled “made in China.” Which led the city’s commerce secretary to protest that Hong Kong was “no more part of China than Canada was part of the United States.” Something which technically should mean he himself be arrested under the new security law.
For international companies in Hong Kong this is a crisis situation. Moody’s credit agency warned China in January against ending “one country, two systems,” and making Hong Kong “just another Chinese city.” To maintain a rating higher than China, Hong Kong’s "distinctive institutional framework” would have to remain in place.
Some 1,300 American companies operate in Hong Kong and their chamber of commerce reports nearly a quarter of them are considering leaving (though “nobody wants to run for the exit").
Until now, US tech companies operated successfully outside China’s infamous Internet Wall. Google announced on Friday that they would no longer respond to data requests from the Hong Kong authorities. Facebook and Twitter have also suspended data provision.
Banking giants Standard Chartered and HSBC are caught between London domiciles and Hong Kong realities (Hong Kong is 88% of HSBC‘s global profits). Recent court documents in Canada showed HSBC providing evidence against Meng Wanzhou (the Huawei executive detained there) which didn’t go down well in China. One newspaper observed “wallowing in degradation and with its reputation at rock bottom, HSBC may struggle to continue…in China.” The company tried to claw back with a cringing statement on social media supporting the new Security Law, only in turn to be castigated in the UK parliament.
Torn between East and West, will HSBC eventually have to split in two?
China is risking a lot here. Some argue it's because Hong Kong is less important to them now. At handover in 1997 it was the equivalent of 18% of China’s GDP, it is less than 3% now. It was once China’s largest port, now it is its sixth, with Shanghai handling twice as much shipping. The thinking goes that it's part of a deliberate Chinese plan in their very controlled economy.
But this perspective is wrong and ignores Hong Kong’s continuing financial importance. Of Foreign Direct Investment in China, $90 billion (out of a total of $138 billion) comes via Hong Kong ($87 billion out of $143 billion for outward investment). Chinese companies mainly choose to IPO in Hong Kong, making it the world’s top IPO destination in seven of the last 11 years. Thanks to its separate currency and dollar peg, Hong Kong provides Chinese companies with dollar financing.
In fact, far from downgrading Hong Kong, China seems determined to build on its success. Regulator Fang Xinghai recently asserted “there shouldn’t be a whiff of pessimism” about Hong Kong’s future as an international finance centre, as he launched a major new initiative “Wealth management Connect.” This week it launches ‘Hang Seng Tech,’ cementing Hong Kong’s role as the gateway to China tech. And the Hang Seng main index has been shaken up to incorporate major Chinese companies Alibaba, Xiaomi and WuXi Biologics. More listings of mainland Chinese firms are coming (Ant Group, NetEase and JD.com).
The scrutiny of a New York listing is becoming increasingly uncomfortable. Wolfpack Research homed in on iQIYI (China’s Netflix) exposing dodgy accounting which led the SEC to open an investigation on Friday. The company says it is cooperating with the SEC.
Wealth management is already pretty connected to the mainland. There’s a lot of money being made in China at the moment – most of it by senior members of the Communist regime. Watch the wonderful video of the thousands of gold bars found in the storeroom of Mr. Zhang Qi, formerly Secretary of the Communist Party in Hainan. Some 13.5 tonnes of them. China has morphed into a straightforward plutocracy. A group of billionaires organizing the nation to fulfil their business interests, and those of their children. The “red aristocracy,” and their “princelings.“
Hong Kong is intimately part of this system. Sixty percent of the $553 billion in private trusts comes from mainland china. President Xi’s sister Qi Qiaoqiao was buying property there even before handover, and his niece Zhang Yannan has a $19 million villa now. Consider also the daughter of China’s number three Li Zhanshu (who actually introduced the new Security Law) Li Qianxin. She appeared alongside Carrie Lam at a launch event for the law. At 38 she is chair of a state owned investment bank in Hong Kong, and owns a $15 million townhouse. Her partner, Chua Hwa Por, spent hundreds of millions of dollars on a stake in the Peninsular hotel, and bought a racehorse appropriately named “Limitless.” His activities were exposed by ….Jimmy Lai.
China hasn’t downgraded Hong Kong. Far from it. Basically it just thinks it can keep getting away with it.
As the new HSBC advertising campaign in Hong Kong aptly says “the story continues…as long as people believe it will…”
Christopher Walker is a writer on business and politics. He sat for several years on the asset allocation committee of a major asset manager.