Hong Kong has long been seen as a gateway for capital into and out of China. But the territory is facing growing competition as China prepares to open its financial system and Charles Li, the CEO of Hong Kong Exchange and Clearing, has warned that Hong Kong is in danger of being cast adrift as it struggles to catch up with rival leading financial centres such as London and New York.
‘Over the last thirty years, Hong Kong has essentially been an equity market raising capital for China,’ Li said, speaking at the Asian Financial Forum in Hong Kong. ‘But today we need to be the recipient and the destination of that capital in terms of fixed income, currency, derivatives and commodities. Unless you are able to offer all of that, you’re not a real financial centre, because equity markets are old to the world. There are only 4 or 5 real truly global leading centres, like Chicago, New York, Frankfurt and London. We want Hong Kong on that map, but it’s going to take a while for us to get there.’
Hong Kong is also vulnerable as China looks to free up its economy. The world’s second-largest economy has recently opened up its tightly-controlled financial sector to encourage a fresh wave of economic growth. In Beijing, the government’s grip on interest rates and financial and capital markets has loosened. Meanwhile a free-trade zone has been launched in Shanghai where controls on key sectors will be eased.
As a result, China’s economy is becoming easier for global players to access, which will accelerate as proposed currency reforms allow investors to trade the renminbi across China’s borders freely.
So far, China has taken a gradual approach, issuing quotas for cross-border investments by institutions and capping the amount of currency that individuals can exchange.
But if China does fully liberalise its financial system, corporates will need a marketplace for hedging their exposures, and Li expressed concern about Hong Kong’s ability to deliver. ‘China today needs that from us and we don’t have it,’ he added.