Who's Backing China in Hong Kong

In mid-November, the chief executive of a prominent Hong Kong hedge fund rented an office across the border in Shenzhen. Two of his mainland Chinese staff had suffered abuse on their commute and felt unsafe. The new premises were a “panic room”.

A day later, when three of his local staff were tear-gassed on their way out of a client meeting, the fund looked into registering an office in Singapore.

“There’s a whole ideology for a lot of people of pretending that it’s business as usual for Hong Kong and the financial industry. That’s insane,” he said. “Not only is it not normal, [that attitude] is preventing us working out how we need to change.”

Outwardly, though, international banks such as HSBC and Goldman Sachs, leading UK and US law firms and the Big Four accountants are sticking firmly to the message that nothing has changed in the face of continued demonstrations and confrontations between police and protesters.

“What’s interesting is that while I think shops and local trade has dropped off quite a lot, on the legal side it really is business as usual,” said Charlie Jacobs, a senior partner at Linklaters, which has 182 lawyers in Hong Kong and has been in the territory for 40 years. 

Others admit privately they fall back on the mantra to avoid causing offence and to disguise their inability to move from such a uniquely lucrative place. 

Hong Kong’s status is fiercely protected by four factors: its ease of doing business; its unique role as nexus between China and the outside world; the rule of law; and the lack of truly viable alternatives. 

As David Gaud, chief investment officer for Asia at private bank Pictet, put it: “HK as a hub to invest in Chinese assets is still very much OK.” 

Hong Kong’s status as the pre-eminent Asian financial hub is secure, said Angel Ng, Citigroup’s Hong Kong and Macau chief executive, as long as the “one country, two systems” model remains intact. This framework, which allows the territory a high degree of legal autonomy from mainland China for 50 years after the handover from British to Chinese rule in 1997, is a cornerstone for business.

Yet in the heat of recent months, many — including Charles Li, chief executive of the Hong Kong Stock Exchange — have warned that model was flawed from the outset. 

As protests enter their seventh month — and the city slips further into recession — the “business as usual” spiel sounds ever more hollow and doubts over Hong Kong’s future as a global financial centre are at their most acute in a generation.

For a city whose stock market is worth 12 times its gross domestic product, threats to the territory’s primacy as a financial hub over local rivals such as Singapore, Tokyo and Shanghai have always been taken seriously. The difference now, said the head of one large Hong Kong investment group, is it is no longer clear China is unreservedly rooting for the city’s success.

Beyond the plumes of flames that have burnt on the doorsteps of leading Chinese bank branches and the riot police on the streets, the protests have left a mark on the day-to-day functioning of Hong Kong.

Conferences and other important annual fixtures in the global financial calendar have been cancelled; many events that have gone ahead have been sparsely attended and companies have quietly begun placing limits on travel to Hong Kong. Professional services firm EY, for example, has cancelled all trips to the city that are not for essential client meetings. Commercial rents have been pummelled and deals have been put on hold. 

Perceptions of personal risk have also shifted. A Citigroup banker was arrested; an employee at BNP Paribas left the company after posting messages in support of protesters on social media; a mainland Chinese JPMorgan banker was assaulted by a demonstrator outside the company’s offices.

Recruiters for investment banks and asset managers attending the big recruitment fairs in Tokyo and Boston report that the frontline candidates will not consider jobs in Hong Kong.

Although large parts of the city have been relatively untouched by the protests, the disruption to transport and schools and the starkness of the violence against the city’s once peaceful image have prompted a surge in inquiries to relocation companies by individuals — though not actual companies yet — wanting to quit Hong Kong altogether.

But those leaving will be turning their backs on a city that continues to be a rich source of revenues. Having suffered from a lack of activity during the summer, Hong Kong’s stock exchange has been given a boost by a string of listings in recent months, culminating in Alibaba’s $11bn equity raising — the biggest offering this year. 

The economic importance of Hong Kong to the world’s largest financial institutions — locked into the city’s role as a gateway to and from mainland China — is vast. At HSBC, which counts the city as one of its biggest markets globally, about 25 per cent of local revenues are “immediately at risk from the protests”, according to one person with direct knowledge of the matter. Most of that income comes from wealth management assets.

It is also the largest single market for Standard Chartered, accounting for about a quarter of the London-headquartered bank’s $15bn operating income last year. Even for US-based Citigroup, Hong Kong is the fourth-largest market after the US, UK and Mexico. 

Behind the scenes, global banks, funds and financial services companies are making sotto voce preparations. For now, they envisage an uncomfortable thrum of violence that, while bad by historic Hong Kong standards, is manageable. The tipping point, said one, would be “a horror story scenario” in which they simply cannot trade or perform other businesses because of the danger or disruption.

At one US investment bank, managers considered dispatching staff to a back-up office a few miles north, connected to a separate power grid and intended as a sanctuary should a crisis hit headquarters. “You think that’ll be enough, then something like this happens and you have to rethink. Pop-up riots all over town was not something anyone planned for,” said an employee of the bank. Hedge funds are being discreetly induced to relocate from Hong Kong by the governments of Tokyo and Singapore. A substantial number say they are considering the latter option, though one added that the disruption would have to be “a factor worse” to actually make the move.  Senior bankers face different issues. They acknowledge that prolonged street violence will affect their ability to retain and recruit people but are painfully aware that the alternative Asian centres are not yet ready. “In the region, I don’t see any other choices,” said the head of equity capital markets at one major European bank.

Added to that, many argue that any big signal of withdrawal from Hong Kong could deal catastrophic damage to their all-important relationship with the Chinese government.

Some senior bankers at global banks say they feel trapped by the instability. Moving people out of Hong Kong is more than a financial or economic decision, they say, it is also a strong political message to Beijing.

“There are no lack of challenges,” said Citi’s Ms Ng. But Hong Kong’s strategic position as a gateway for Chinese companies to access the capital markets and as a renminbi clearing house was secure, she added, echoing similar comments from other top bankers. “Yes, there will probably be some changes in daily life, but [Hong Kong’s importance] fundamentally won’t change. And in the financial industry that is the most important anchor for confidence.”

George Hammond and Leo Lewis in Hong Kong and Don Weinland in Beijing NOVEMBER 28 2019

Additional reporting from David Crow, Caroline Binham, Laura Noonan, Hudson Lockett and Tabby Kinder


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