Stormy Harbor: How Hong Kong May Lose Its Status as One of Asia's Largest Business Centers

Hong Kong, one of Asia’s largest business centers, is facing economic decline. Thus, the Ministry of Population Census and Statistics recorded a decline in GDP of 0.3% in the second quarter compared to the previous quarter instead of a projected growth of 0.9%. In addition, in 2019, the business confidence index became the lowest in the last ten years. According to the forecast of DBS Bank, Hong Kong's GDP growth in 2019 will decrease from 2.5% to zero.

In an interview with RT, Dmitry Alexandrov, chief strategist at UNIVER Capital, also pointed to other indicators indicating problems in the Hong Kong economy.

“Now, a huge amount of capital flows through Hong Kong; already in March this year, the figure reached $ 1.6 billion per day. The island’s standard of living and salaries have decreased, social and economic inequality has increased dramatically, and GDP growth has slowed, ”the expert said.

Analysts believe that the ongoing trade war between the US and China and Beijing’s integration policies led to lower economic performance. For over 20 years, Hong Kong has existed according to the Chinese model of "one country - two systems" in which it serves as a financial center. Although autonomy does not have official offshore status, according to a KPMG study, Hong Kong is the main offshore center for large business from mainland China.

The head of the HSE School of Oriental Studies, Alexei Maslov, in an interview with RT, said that 90% of Hong Kong's income comes from financial services. However, the expert noted that from January-February 2019, capital outflows began due to the PRC's intentions to make part of the Great Bay from Hong Kong and erode financial and economic independence, without formally violating the region’s autonomy.

“Obviously, many companies, including offshore ones, were scared of inspections of the PRC. Therefore, Hong Kong today cannot be a launching pad for large and medium-sized businesses. The creation of the Great Bay zone is one of Xi Jinping's most important projects for the internal development of the region. In addition to Hong Kong, they want to include Macau and the Guangdong province, which should become a major innovation center, ”Maslov said.

Capital outflow

Hong Kong business circles are also worried by a bill on extradition of criminals initiated by the PRC. In addition to various serious crimes, the list includes violations in the financial sector.

Head of BCS Broker Investment Department Narek Avakyan, in a conversation with RT, expressed the opinion that the outflow of capital from Hong Kong is directly related to the bill that they want to adopt in mainland China.

“Probably, the PRC authorities are trying to increase the transparency of the country's financial sector and reduce the size of the shadow banking system, while at the same time reducing the possibility of withdrawing capital and avoiding taxes. The scale of these problems in China is really very large - shadow banking reaches tens of trillions of yuan, and this problem has existed for a very long time, ”Avakyan noted.

The worsening socio-economic situation, along with China's attempts to deprive autonomy of financial and economic independence, provoked protests from the population, which had already led to losses for local small businesses. According to the Hong Kong Census and Statistics Ministry, retailer sales in June fell 12.5%. Moreover, experts note that social tensions in the city will negatively affect investment attractiveness.

“Hong Kong has already ceased to be considered a safe haven for foreign investment and foreign companies. Image losses are so great that Hong Kong is unlikely to recover in the coming decades. Moreover, China will block the flow of money so that there are no local Hong Kong elites that are not oriented to the PRC. It is very simple to do this, because in Hong Kong there is practically no production of its own, but only financial services, ”emphasized Alexey Maslov.

Singapore is one of Hong Kong's main competitors in Asia in attracting investment. Like Hong Kong, the former British colony has become a major financial center with a highly developed banking system and attractive legislation for foreign investment. And in this situation, Singapore has already begun to receive investments from Hong Kong-based companies. However, other developing financial platforms may also benefit, experts say.

“Capital from Hong Kong is fleeing to Singapore, especially for high-tech startups. Vietnam’s financial centers will benefit from this situation, and Indonesia’s financial sites will also begin to work actively - in Jakarta and Bandung. It is possible that part of the capital may move to Malta and, possibly, to Portugal, ”Maslov concluded.