Capital flows and Hong Kong’s future

CHINA ADVISORY - Report 05 Jun 2020 by Andrew Collier

Hong Kong’s role as a financial center is likely to be diminished due to the incursion of mainland security forces into the city and the introduction of a new national security law. Any efforts to halt the demonstrations involving these forces would likely increase the uncertainty regarding the position of Hong Kong’s legal and regulatory system, to the detriment of foreign and domestic investors.

This will increase capital flight, reduce the attraction of Hong Kong as an investment door to China, and weaken the willingness of investors to transact business through Hong Kong. However, there are several, potentially significant, countervailing forces:

1) The first is the ability of the mainland to use state proxies to invest in key sectors such as the property market and bank branches, along with equities.
2) Second, if the US decides to force Chinese companies to adhere to US financial regulations, and they delist, there is a likelihood that many would relist in Hong Kong, increasing the market capitalization of the equity markets and the attraction of the Hong Kong market.

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