by Ian Fraser
Hong Kong urgently needs to become a more broadly-based financial center if it is to avoid losing out as China internationalizes its economy, Li Xiaojia (Charles), chief executive of Hong Kong Exchanges and Clearing has warned.
Speaking at a breakfast event at the Asian Financial Forum on 14 January, Li said that for the past 30 years, Hong Kong has benefited hugely from its proximity to China, and from China's "slow opening" to the world. But he said the former British colony was now at significant risk, especially if "China changes too fast." As a conduit for trade, foreign direct investment, and capital market formation, Hong Kong has traditionally helped channel capital into the People's Republic of China, enabling it to grow and modernize its economy.
Born in Beijing in 1961, Li is a former journalist on the English language China Daily. He is also a U.S. qualified lawyer, a former chief executive of Merrill Lynch China and a former chairman of Morgan Stanley China. He became the first person from mainland China to lead the Hong Kong stock exchange when he took his current position in December 2009.
Now that capital is flowing out of China, Li warned Hong Kong is vulnerable. "Hong Kong is not ready [to ensure] that we are the destination of that capital." He highlighted weaknesses in fixed income, currencies, commodities, and derivatives, adding that "unless you offer that, you are not a true financial center." He argued that Hong Kong - which became a special administrative region of China 15 years ago - had only a narrow "window" to build expertise and presence in these areas. However he admitted they are "much harder to deliver that than equities."
Li said that as the renminbi becomes a convertible currency over the next five to ten years, there will be a surge in demand for services to manage exchange rate risk and interest rate risk. "Imagine the volatility [that renminbi liberalization] is going to create in the global markets, and the opportunity for financial institutions in that trend. But [Hong Kong] is not ready, and we need to race against the clock."
There was a real risk that Hong could be "surpassed" and even become redundant if it does not offer such services fast enough. The implication seemed to be that, if Hong Kong gets this wrong, its shiny cluster of skyscrapers overlooking the fragrant harbour in the South China Sea may become an Ozymandian relic.
Lawrence Lau, chairman of the Hong Kong subsidiary of Chinese sovereign wealth fund, the China Investment Corporation, said Hong Kong ought to be seeking IPOs from across the Asia-Pacific region and Africa, and that it must develop a corporate bond market. He suggested Hong Kong should capitalise on its common law legal system in order to develop into a reinsurance center. Lau argued that the tax advantages that Hong Kong could offer, including no taxation of dividends or capital gains, gave it a "tremendous advantage" in servicing China and other countries in the Asian region.
John Rice, CEO of General Electric's (NYSE:GE) Global Growth and Operations division, an American who has been based in Hong Kong for three years, told the event that Hong Kong has "a well-deserved reputation for global commerce, earned over a long period of time. But there is no guarantee that will continue going forward." He said Hong Kong must, as a matter or urgency, tackle pollution. He said GE is now unable to persuade young managers with children to relocate to Beijing, because of the levels of pollution in the Chinese capital. "Hong Kong needs to be careful [about pollution]. If it is not, the expats of the future will end up going someplace else." Lau argued that another problem facing Hong Kong is education. He said that only 20% of the S.A.R.'s 18-22-year-olds go to university or college, and that in terms of proficiency in the English language mainland China is catching up very quickly.
Li added "for fixed income and currencies to take off in Hong Kong, we need to form the right partnership with China. We need to position ourselves as long-term partners as opposed to offering a rival brand. If you do that, they'll try to shoot you down [especially as they try to internationalize]." He compared China to an "exploding ball", and Hong Kong needs to remain on the edge "exploding into the international market."
Ian Fraser travelled to Hong Kong as a guest of the Hong Kong Trade Development Council.