The implications are grim for those invested in the city’s role as an international financial center, but many Chinese firms will thrive anyway

In June 1995, Fortune magazine proclaimed “the death of Hong Kong” ahead of the then British Crown Colony’s handover to China. With anxiety mounting about how the freewheeling capitalist city would fare under the communist motherland’s rule, the controversial article pulled no punches. “In fact, the naked truth about Hong Kong's future can be summed up in two words: It's over,” the authors wrote.  

For almost 25 years, it appeared Fortune had jumped the gun. Despite some foreboding signs, like Beijing’s failure to approve promised universal suffrage in the city, Hong Kong thrived in many respects. The city leveraged its deep connections with the mainland to attract high-flying Chinese companies to list on the Hong Kong Stock Exchange. Bankers who sought to serve the growing mainland market flocked to the city. As an international financial center in Asia, Hong Kong retained pride of place.

Crucially, Beijing did not tinker with the legal infrastructure established by the British that made Hong Kong an attractive place to do business. There was also a relatively free media environment compared to the mainland, which matters for the financial sector.  

Hong Kong changed dramatically with the central government’s imposition of a draconian national security law in June 2020 that bypassed the city’s legislature. The law, which has been used to silence, sanction and jail opponents of the Chinese Communist Party, including journalists, signaled the beginning of the end that Fortune predicted back in 1995.

As ominous as the law was, the final straw for boosters of the city as an international financial center came more recently – with Hong Kong’s strict adherence to the mainland’s “zero-Covid” policy, a fruitless, politically-driven bid to eliminate one of the most infectious respiratory diseases on earth. Like the mainland, Hong Kong has barred non-residents and forced residents who travel internationally to undergo lengthy hotel quarantines upon their return.

The exodus of foreign professionals from the city is now real. Firms are leaving too, though many are moving stealthily to avoid provoking Beijing. A poll last year by the Asia Securities Industry & Financial Markets Association (ASIFMA) found that almost half of all major international banks and asset management firms in Hong Kong were considering moving at least some employees or job functions out of the city.

A survey published in January by the American Chamber of Commerce in Hong Kong found that 60% of members felt the rule of law had worsened in the past 12 months, though just 5% had definite plans to move their headquarters out of the city. About half were “unsure” about that decision, likely reflecting the political sensitivity of the issue.

The ASIFMA and AmCham surveys were conducted before the most recent and worst Covid outbreak in Hong Kong, during which the city adopted mainland-style “anti-epidemic measures” like quarantine camps and mulled testing the city’s entire population – a hallmark of zero-Covid efforts on the mainland.

Though Hong Kong backed off from mass testing and has signaled its intention to pursue a different path from the mainland – in April it shortened quarantine to seven days and in May lifted a 26-month-old ban on non-residents – the damage has been done. Many businesspeople with longstanding ties to the city have lost confidence in the Hong Kong government, which is now widely viewed as inept.

In April embattled chief executive Carrie Lam said she would not seek a second term, citing family reasons. Her successor, John Lee, has spent his career in law enforcement and led the crackdown on the 2019 pro-democracy protests. While Lee may have Beijing’s blessing for the job, his appointment is unlikely to assuage the business community’s concerns. Selecting a former police officer over someone with extensive business experience shows that the ruling Communist Party prioritizes security over economic matters in Hong Kong.

"Safeguarding our country’s sovereignty, national security and development interests, and protecting Hong Kong from internal and external threats, and ensuring its stability will continue to be of paramount importance," Lee told reporters after winning the endorsement of a pro-Beijing election committee in May.

Financial center with Chinese characteristics 

The de facto end of “one country, two systems” in Hong Kong will not mean the end of international financial firms in the city, as many still have high hopes for opportunities in the mainland. A notable example is the Greater Bay Area, which has a total population of 86 million across 9 Guangdong Province cities, Hong Kong and Macau. Some firms may move personnel to the mainland, but the many restrictions in China’s domestic financial system, such as capital controls, mean that Hong Kong will retain certain competitive advantages for these firms.

However, international companies that used Hong Kong as a regional base will likely shift more personnel to Singapore over the long term. Compared to Hong Kong. Singapore has a more stable and predictable business environment, more able political leadership and better upholds the rule of law. Though the city-state is not exactly a bastion of press freedom, analysts based there have more freedom to speak candidly about financial and economic matters. In Hong Kong, speaking too negatively about a Chinese company or the Chinese economy could land an analyst or the analyst’s employer in hot water. Investors cannot depend on analysis skewed to please the Chinese Communist Party though.

Singapore is already home to more headquarter jobs from global Fortune 500 companies than any other Asian city. Firms from Apple to Microsoft to General Motors to Walt Disney have their regional headquarters in the city-state.

Hong Kong, meanwhile, has slowly been losing regional headquarters, except in the case of mainland Chinese firms. Data compiled by the Hong Kong government’s statistics bureau show that mainland companies had 252 such offices in the city in 2021, up from 197 in 2018. In contrast, American companies had 254 regional offices in Hong Kong last year, down from 290 in 2018. The number of Japanese companies with regional Hong Kong headquarters also fell during that same period, from 244 to 210. Overall, Hong Kong’s regional headquarters fell to 1,457 in 2021 from 1,530 in 2018, a decline of 4.7%. The fallout over the city’s efforts to contain the coronavirus will likely spur additional relocation plans.

Where Hong Kong will retain a clear advantage over Singapore and other Asian financial centers is in its ability to attract big-ticket IPOs. Singapore lacks Hong Kong’s deep and liquid capital markets. Hong Kong’s IPO market has been the world’s largest seven times since 2009. Singapore’s never cracked the top 10 during that period.

Though Hong Kong’s IPO market has been sluggish in 2022, the easing of China’s long-running crackdown on technology companies could pave the way for a revival in the second half of the year. With the Chinese economy reeling from zero Covid, Beijing signaled in late April at a Politburo meeting hosted by Chinese leader Xi Jinping that it would give tech firms a reprieve. A statement issued after the meeting said that China would promote the “healthy development” of the internet platform economy, normalize control over the technology industry and design specific measures to support it.

Chinese tech firms that had suspended their Hong Kong IPO plans due to the unfavorable market environment will likely cautiously restart the process. The most significant IPO on ice is Ant Group’s, which as a dual Hong Kong-Shanghai listing was expected to raise US$34.5 billion and value the firm at US$313.5 billion before regulators nixed it. While Ant is a less valuable company now – largely due to forced restructuring that has reduced profitability – it still could stage an impressive market debut if given the regulatory green light.

Another expected Hong Kong listing is Didi Chuxing, which has not fared well since its calamitous debut on the New York Stock Exchange (NYSE) last June. As of late April, Chinese regulators still had not approved Didi’s plan to shift its listing to Hong Kong. They told the company it would not get the green light until it made adequate “rectifications” per the orders of China’s Cyberspace Administration. Yet now that China’s top leadership has signaled an intention to support the tech sector, Didi could find that approval forthcoming.

In the long run, Hong Kong’s IPO market will benefit from deep-seated U.S.-China tensions, which are fast becoming a civilizational conflict in everything but name. Chinese firms listed in New York will continue to hedge their bets by carrying out secondary listings in the former British Crown Colony, as Alibaba has done, and other Chinese companies that might have preferred to go public in the U.S. in a different political environment will choose Hong Kong instead.

The words of a Hong Kong billionaire quoted anonymously in Fortune’s 1995 article still ring true. Hong Kong will continue to be ‘“a place where you can make plenty of money,”’ he said.