Hong Kong Rejoins the World
Hong Kong Chief Executive John Lee delivers his first annual policy address at the Legislative Council in Hong Kong, China October 19, 2022. REUTERS/Tyrone Siu (China)
Hong Kong Chief Executive John Lee delivers his first annual policy address at the Legislative Council in Hong Kong, China October 19, 2022. REUTERS/Tyrone Siu (China)

3 Years of upheaval

John Lee, Hong Kong’s Chief Executive and hand-picked successor to the disastrous Carrie Lam recently announced the end of hotel quarantine for arrivals into Hong Kong.  Severe lockdowns, quarantine restrictions and closed borders were a common response to the Covid pandemic across much of Asia but for Hong Kong, once home to one of the busiest airports in Asia and a place that thrived on the comings and goings of businesspeople and tourists alike the measures changed the city overnight.  The many and varied measures meant that not only did those trying to get into the city require up to 3 weeks in a government quarantine facility they needed to pay through the nose for extremely expensive and limited flight tickets as airlines were either punished and banned for allowing infected travelers to arrive in Hong Kong or they just cancelled flights as there was no demand for seats.

That left local workers unable to leave the city, it forced students to remain stuck overseas and away from family for years at a time and Hong Kong simply disappeared from business trips for all but the most determined and connected of businesspeople.

Re-opening after such a traumatic time would be a difficult challenge for any place.  Singapore which bit the bullet many months ago and understood the need to move towards a “living with covid” approach has largely been successful after achieving high vaccination rates with mRNA vaccines across the entire population, but they have still seen spikes in case loads but with limited demand on hospital facilities.  The Hong Kong that is now back open for business is a very different place from three years ago.  June 2019 saw the start of the 7 months of protest marches, strikes, riots and upheaval around the extradition bill which Carrie Lam tried to force on the city.  Only the onset of Covid in early 2020 stopped those protests and since then, within the safe space which covid allowed them the government have systematically rooted out dissent, real or imagined and jailed hundreds of Hong Kong locals who dare question the political framework.  This has been carried out largely under the umbrella of the National Security Law, NSL, which allows the Hong Kong government to detain almost anyone for criticizing the government.

Under the NSL the freedom of the press has been heavily curtained with many organizations closing down for fear being seen as subversive.  The most famous high profile media outlet being Apple Daily which was raided by the police, had files and assets seized, and its outspoken founder Jimmy Lai being thrown in jail.  Many workers unions too have closed down as have a number of civil society groups which stood for human rights within China.  School textbooks have been removed and patriotic education lauding the achievements of the Communist Party and Xi Jinping are becoming the norm.  Not surprising the civil society clampdown in the name of national security has led to hundreds of thousands leaving Hong Kong.  Covid of course played a part but between the NSL restrictions and the needlessly extreme covid measures the city has been hollowed out.  The Hong Kong which opens to the world is a very different place from the one of early 2019.

The world has changed as well

In his 3 hour policy address John Lee announced a slew of measure to try and attract talent.  Some ideas such as offering free business class tickets seem just silly whereas other measures like special talent visas for high paid foreigners seem to mimic Singapore plans.  Lee also parrots the approved government lines about the important role that Hong Kong can play in the Greater Bay Area, GBA, which is a vision of the various cities around the Pearl River delta complementing and working with each other to build a world leading mega area.  This seems wishful thinking at best to any serious analysis, but the approved line is the integration of Hong Kong into the mainland.  One country is far more important than two systems.

But his proposals are willfully blind to the changes brought locally by the NSL but also within the post-covid world. Consider just three global changes.  Firstly, China remains closed to the world.  Early in the pandemic Carrie Lam stated she wanted to open Hong Kong first to China and opening to the world would have later.  Mismanagement of covid resulted in huge infection rates in the city and closed off any hope of an opening with China but now that Hong Kong is starting to live with covid how can it serve as the gateway to China as the country retains it highly restrictive zero-covid policy?  GBA integration for Hong Kong is a non-starter with a closed border, and even within zero-covid China life is not back to pre-covid normal by any means.  All citizens are restricted in their movements depending on the colour on their health code app.  Testing every few days and the need for a green status code has severely damaged the Chinese economy.  So China is neither open for business and neither is it growing at the rates it was even a few years ago.  The basically proposition of Hong Kong as the easy gateway to the world’s fastest growing economy no longer holds true.

Secondly the draconian crackdown has without doubt sent shockwaves through the broader business community.  Other cities, whether they be Taipei, Singapore, Seoul or middle eastern centres like Dubai have certainly benefited to varying degrees by the Hong Kong exodus.  Hong Kong had always served as a firstly a China focused business centre.  As China was such a large economy that meant it had an international standing as well but the city had failed to develop ties other countries in Asia.  No corporate would see sense in making today’s Hong Kong a hub for South East Asian business, nor for Indian and sub-continent activities.  Hong Kong more than ever offers only a China story and that story has been dramatically damaged over the past few years.  The recent Biden administration restrictions around using US technology and personal in advanced microchip design are a far tougher measure against China than anything the Trump administration ever did.  Whether you call it superpower rivalry or China containment there is no sign that the decoupling and divergence between the world’s two largest economies is going to stop anytime soon and that cannot be good for Hong Kong.

Finally, as the 20th Party Congress has demonstrated very clearly.  Xi Jinping has only strengthened his rule, one man dictatorship is the reality in China.  The era of refom and opening is over.  Xi may believe his approach is addressing the faults that came with reform and opening but his approach has brought about an era of control and opacity.  Hong Kong has benefited tremendously from the Deng era of reform and opening, Xi’s world is very different and the direction of travel, i.e. the expectation of opening and greater access to markets just no longer holds.

Sanctions and War

At a very practical level Hong Kong re-opens to a war driven sanctions environment.  Hong Kong leaders, such as John Lee, already had been sanctioned by the US Government over their role in the protest crackdowns and like his predecessor, Carrie Lam, he will be getting paid in cash as banks won’t accept his business.  Those specific sanctions continue to cover most of the leading figures within Hong Kong government so there has to be a concern from US businesses that even meeting with John Lee and his team could result in some breaching of sanctions.

On top of that the Russian invasion of Ukraine has resulted in a vast array of both US and EU sanctions against Russian entities, individuals and those aiding them.  If Hong Kong financial institutions want to remain connected to the US dollar clearing system it is essential that they abide by them.  The territory’s central bank, the Hong Kong Monetary Authority, has told banks that they need not follow such sanctions but to ignore them would be corporate suicide.  No global bank can afford to incur the wrath of the US Office of Foreign Assets Control.  Local media report that Russian passport holders are finding virtually impossible to open a bank account in the city and that any financial dealing comes under scrutiny.  It is into this environment that Hong Kong allows luxury yacht Nord, allegedly owned by sanctioned Russian oligarch Alexei Mordashov, to sail into its harbour.  Internet searches show the yacht now in the South China Sea on its way to South Africa but the Hong Kong Government announcement it would not look to detain the vessel, as many European countries have already done in similar cases, sent a worrying message about how Hong Kong would engage with global sanctions.

Very simply Hong Kong cannot afford to become a hideaway for sanctioned individuals, companies or assets for Russia, Iran or anywhere else.  China’s close and foolish support for Russia in Putin’s invasion of Ukraine is tragic but fundamentally no surprise.  Hong Kong is now under direct control effectively from Beijing so its lack of action isn’t the surprise but why not tell it to keep sailing to Macau or some other port.  Why even allow the good name of Hong Kong to be associated with possible sanctions busting?  By flirting with such behaviour compliance departments at all global banks will be looking even harder at Hong Kong to ensure that the funds or investment aren’t just a front for some Russian backed operation.  That raises the cost of doing business not only within Hong Kong but with any Hong Kong entity.  Not a smart move for a city trying to regain a place at the top table of international financial centers.

Can Hong Kong bounce back?

Nothing ever bounces back to the height from which it was dropped.  After three years of upheaval, change, missteps, and civil turmoil Hong Kong will not be able to fully regain the role it once played.  That won’t mean that Hong Kong won’t have a role to play in Xi’s new China.  With zero chance of currency controls being removed on the renminbi Hong Kong’s convertible currency will remain a unique asset for the Chinese economy.  It’s hugely successful Connect scheme channeling funds into and out of China, albeit with many caveats, will contain and probably expand.  As US listings for Chinese companies become more demanding Hong Kong too can play a role there as a listing venue as will a number of other possible avenues of bilateral flow or fundraising.  But even the financial sector which has so long been the crown jewel of the Hong Kong economy will face many headwinds some of which have been described above.

The city will still attract those looking to gain exposure to Asia and it will remain a magnet for many in the mainland who value the greater freedoms which Hong Kong continues to enjoy over Shanghai or Beijing.  Its skyline will still continue to wow visitors and locals alike and the energy on the streets will remain although perhaps never be quite the same intensity as it once was.

The past three years has seen the city receive knock up knock as Beijing has exerted its control.  It has imposed its will on the city and brought it to heel.  The city has jailed or driven out some of its most vocal, passionate and creative talents.  How can it not suffer after this?  The city’s path has been dramatically altered by the past three years and the city will survive but as one Hongkonger said in reply to a mainlander at the time of the 2014 protests, “there is more to life than just surviving”.

フレイザー・ハウイー(Howie, Fraser)|アナリスト。ケンブリッジ大学で物理を専攻し、北京語言文化大学で中国語を学んだのち、20年以上にわたりアジア株を中心に取引と分析、執筆活動を行う。この間、香港、北京、シンガポールでベアリングス銀行、バンカース・トラスト、モルガン・スタンレー、中国国際金融(CICC)に勤務。2003年から2012年まではフランス系証券会社のCLSAアジア・パシフィック・マーケッツ(シンガポール)で上場派生商品と疑似ストックオプション担当の代表取締役を務めた。「エコノミスト」誌2011年ブック・オブ・ザ・イヤーを受賞し、ブルームバーグのビジネス書トップ10に選ばれた“Red Capitalism : The Fragile Financial Foundations of China's Extraordinary Rise”(赤い資本主義:中国の並外れた成長と脆弱な金融基盤)をはじめ、3冊の共著書がある。「ウォール・ストリート・ジャーナル」、「フォーリン・ポリシー」、「チャイナ・エコノミック・クォータリー」、「日経アジアレビュー」に定期的に寄稿するほか、CNBC、ブルームバーグ、BBCにコメンテーターとして頻繫に登場している。 // Fraser Howie is co-author of three books on the Chinese financial system, Red Capitalism: The Fragile Financial Foundations of China’s Extraordinary Rise (named a Book of the Year 2011 by The Economist magazine and one of the top ten business books of the year by Bloomberg), Privatizing China: Inside China’s Stock Markets and “To Get Rich is Glorious” China’s Stock Market in the ‘80s and ‘90s. He studied Natural Sciences (Physics) at Cambridge University and Chinese at Beijing Language and Culture University and for over twenty years has been trading, analyzing and writing about Asian stock markets. During that time he has worked in Hong Kong Beijing and Singapore. He has worked for Baring Securities, Bankers Trust, Morgan Stanley, CICC and from 2003 to 2012 he worked at CLSA as a Managing Director in the Listed Derivatives and Synthetic Equity department. His work has been published in the Wall Street Journal, Foreign Policy, China Economic Quarterly and the Nikkei Asian Review, and is a regular commentator on CNBC, Bloomberg and the BBC.