By Wan Zhe Source: Global Times Published: 2017-7-10
In recent years, Hong Kong`s economy has been facing the pain of transition, amid financial turbulence at home and abroad and challenges to Hong Kong`s status as an international financial center from Singapore and other cities. At this critical moment, the Belt and Road (B&R) initiative can endow Hong Kong with new impetus.
There are currently three major threats to Hong Kong`s financial security. First, there are the frequent ups and downs in economic cycles. Since the financial crisis in 2008, Hong Kong`s economic growth has slowed down significantly with nearly 70 percent of the government`s revenue coming from "cyclical" income. Compared to other high-income economies, Hong Kong has seen more drastic fluctuations.
Second, Hong Kong has suffered from diminished clout in terms of its financial institutions. Since HSBC relocated its headquarters to London in 1993, there has been no international large-scale financial institution based in Hong Kong. Market dominance has long been in the hands of foreign investors, not only leading to volatility and poor stability in Hong Kong`s financial market, but also resulting in restrictions and inconvenience in dealing with the problems.
Third, emergency mechanisms are not so effective in a free and open market system. The openness of Hong Kong`s financial market has allowed it to attract tremendous investment. But it also means that international hot money can be used for widespread speculation in the market. In the event of a financial tsunami, this would bring huge market damage.
In June 2017, Hong Kong officially joined the Asian Infrastructure Investment Bank (AIIB), marking the start of its full participation in the B&R initiative. The international financing needs of the B&R initiative will promote Hong Kong`s financial internationalization and consolidate its financial security. Hong Kong`s position as Asia`s top financial center has in recent years been challenged by Singapore, which has outperformed Hong Kong in attracting corporate financing from Southeast Asia, international wealth management, foreign exchange and trade in commodities. Hong Kong`s active participation in the B&R initiative, particularly in financing for the required infrastructure, will lead to further internationalization of financial services in Hong Kong. Hong Kong can take full advantage of its low cost and high efficiency in areas of financing such as bond issuance, IPOs and venture capital to provide a diversified financial platform for enterprises and local governments.
The growing international demand for yuan as a result of the B&R initiative will also help to consolidate Hong Kong`s status as an offshore yuan center. The B&R initiative may make the yuan the main settlement currency for trade and investment, and the world`s major financial centers are competing to become the main offshore market for the yuan. The central government has strengthened Hong Kong`s position as the largest offshore yuan center by supporting Hong Kong`s yuan bond market and improving its yuan refinancing mechanism through the establishment in Hong Kong of the largest cross-border trade and investment yuan settlement center. In addition, the central government has launched the Shanghai-Hong Kong Stock Connect and the Shenzhen-Hong Kong Stock Connect and Bond Connect schemes, facilitating greater investment from the mainland and overseas and expanding Hong Kong`s market capacity and scale.
The B&R project to develop the Guangdong-Hong Kong-Macao Greater Bay Area will bring opportunities for Hong Kong, Guangzhou, Shenzhen and other emerging financial centers. In recent years, with the continuous development of the financial industry in Shanghai and Shenzhen, some have suggested that Shanghai could replace Hong Kong as China`s largest international financial center and that Hong Kong`s financial industry will gradually lose its core competitiveness. But this opinion views the competition between Hong Kong, Shanghai, Shenzhen and other cities as a zero-sum game, ignoring the financial complementarity between the Chinese mainland and Hong Kong. This kind of thinking is trying to split the political relations as well as the economic and financial relations of Hong Kong and the Chinese mainland.
In fact, the construction of the Guangdong-Hong Kong-Macao Greater Bay Area is a macro-strategy that can help build cooperation in cross-border finance and other fields. Hong Kong should strengthen its cooperation in the offshore yuan business with Shenzhen in order to establish new patterns and complementary markets.
The author is a visiting fellow at the Chongyang Institute for Financial Studies at Renmin University of China.