by Barry D. Wood

Over the past 12 months Hong Kong’s Hang Seng Index is up 45%, becoming the world’s best performing equity market.  Hong Kong also is the global leader in initial public offerings with 44 deals closed raising $14 billion in the first half of the year.  IPO activity in Hong Kong—almost all from mainland China—is up 700 percent over 2024.

Admittedly Hong Kong is rebounding from a low base.  Stung by imposition of China’s draconian national security law and Covid, Hong Kong shares were down 40% from December 2020 to January 2024. 

The biggest gainers on the Hong Kong exchange include internet giant Tencent (up 59% in 12 months), HSBC (up 52%), Ping An insurance (68%), state-owned financial conglomerate CITIC (61%) and car makers Geely (148%) and BYD (58%).  These Hong Kong listed companies have ADRs available to foreign investors.

David Roche of Hong Kong-based Quantum Strategy says Hong Kong is benefiting from the decoupling of the US from China. Since 2021 19 Chinese firms have delisted from US exchanges and gone to Hong Kong either because of non-compliance with US audit requirements or orders from Beijing.  Three big state-owned telecommunications firms were delisted because of President Joe Biden’s executive order barring Americans from investing in companies with links to the Chinese military.  Also gone are Sinopec, China Life, Petro China and ride hailer DiDi.  Roche says the boom in Hong Kong listings will persist because investors want to be protected from the risk of confiscation in the US.  

The return of financial vibrancy in no way mitigates the backward transformation underway in Hong Kong. It was the rule of law, property rights, media freedom, light regulation and minimal taxation that propelled the British territory into the world’s fourth biggest financial center. Key freedoms enshrined in the basic law accompanying the 1997 handover to China have been rolled back or crushed by Beijing’s suppression of pro-democracy demonstrations in 2019.  Hong Kong’s glory days are over says Yale professor and former long-time Hong Kong resident Stephen Roach. Hong Kong, he says, has become just another Chinese city.

Since the crackdown up to half a million people have left Hong Kong. The number of Asia Pacific corporate headquarters in the territory has shrunk by a third with Singapore now hosting twice as many foreign companies as Hong Kong.  Fedex is among the major American companies to have decamped to Singapore.

But the exodus has been tempered by an equally large influx of mainland Chinese. Despite restrictions Hong Kong retains freedoms that are unavailable on the mainland. Google, Meta, Instagram, X and YouTube can be accessed without restriction.

It is the Hong Kong dollar, pegged at a fixed rate to the US currency,  that is the unique and very valuable Hong Kong asset. Mainland investors, not wanting their savings in RMBs, find Hong Kong attractive because they can easily convert money into Hong Kong currency and then US dollars. 

Hong Kong asset manager Christopher Lee says it is the stability of the currency plus a still sacrosanct body of western commercial law that assures Hong Kong’s viability as a financial center. Eddie Yue, the head of the Hong Kong Monetary Authority,  insists that the currency peg unchanged for 42 years, “is not going to change, period.”

Hong Kong—with its expansive harbor and prime location adjacent to major shipping routes—has been the gateway to China for nearly 200 years.  It will remain so.  It has been designated by Beijing as the financial center of the greater bay area, the Pearl River delta agglomeration of nine megacities with a population of 80 million. 

Hong Kong is becoming less global and more Chinese.  A US lawyer residing in the territory tells me that most of his business is connected to money coming out of China instead of the other way around as it was ten years earlier.

Nobel-winning economist Milton Friedman was enamored with the old Hong Kong, calling it the “world’s freest economy.”  I suspect Friedman would be aghast at the changes that have taken place since 2020. Importantly two pillars in Friedman’s formulation—an independent judiciary and free media—have been badly eroded. Case in point is the imprisonment of Jimmy Lai, publisher of  Apple Daily, what was a popular newspaper. Lai, 77, is the most prominent of at least ten journalists imprisoned for violating the national security law.

Bryan Curtis,  formerly a Hong Kong resident and until recently host of Bloomberg radio’s Daybreak Asia, laments the loss of fundamental freedoms, adding “there is no longer any civil society in Hong Kong.”

Hong Kong, increasingly integrated into a totalitarian China, is a test of whether personal freedom is a requirement for economic prosperity.  As of today the answer would seem to be no.  For example, Tim Huxley, the head of Mandarin Shipping in Hong Kong, speaks for many.  He is optimistic about the territory’s short and long-term future. He regards “the influx of IPOs and utilization of Hong Kong capital markets as a real cause for optimism.” In addition, says Huxley, the pivot toward geographical diversification and away from reliance on US markets is exceedingly positive. #