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There is growing criticism that Hong Kong’s golden age as international financial center is over, with concerns over four major challenges: 1) rule of law, 2) China slowdown, 3) geo-political tension, and 4) talent loss. Arguably, it will take years for Hong Kong to return to its prime. However, we think it is too early to call for a secular downtrend. Here is why:

Rule of Law

The One-Country-Two-Systems policy will stay to preserve Hong Kong as the distinctive gateway of China’s capital flow. Thus far, China’s capital account liberalization is still in-progress. According to the Chinn-Ito Financial Openness Index, Hong Kong’s openness is on top of the league, while China’s capital account remains fairly closed even comparing to low-income country.

As a financial center and largest offshore RMB hub, mainland companies rely on Hong Kong for funds, loans and listings to access global capital. Hong Kong’s sound legal system, regulatory oversight and high disclosure standards ensures international operations and governance standards are met. According to the Rule of Law Index 2023 of the World Justice Project, Hong Kong continues to be ranked as the 6th in East Asia and the Pacific and attained the 23rd out of 142 places. Hong Kong’s ranking was largely on par with other developed countries such as France (21st) and South Korea (19th) and was ranked above the US (26th) and Italy (32nd). In particular, Hong Kong’s ranking in anti-corruption stayed at the front-end at 9th of the world.

Hong Kong intermediates the lion share of China’s direct investment flow. In 2022, Mainland's outward direct investment (ODI) to Hong Kong totaled USD98bn, constituting 60% of China's total ODI outflow. Concurrently, 73% of China’s Foreign Direct Investment (FDI) was channeled through Hong Kong. This mirrored the increasing presence of Chinese regional headquarters in Hong Kong, which rose from 216 in 2019 to 247 in 2023.

Looking forward, the development of RMB internationalization necessitates Hong Kong's role as an international financial hub. Given China's status as Saudi Arabia's largest oil importer and trading partner, Hong Kong stands out as a prime listing destination for Middle East energy and petrochemical firms seeking to enhance their business connections with Beijing.  The recent setup of HKD-RMB Duel-Counter Trading is the major testing ground for future RMB listing for Middle East companies. Relations have proven mutually beneficial as Middle East funds become increasingly active in Hong Kong's stock market. Sovereign wealth funds from Saudi Arabia, Abu Dhabi and Qatar participated as seed investors in the listings of Chinese companies last year.

China’s tech giants, green energies, and infrastructure companies are making strides in the Middle East. These include Saudi Arabia's 5G and smart city (NEOM New City and Saudi Vision 2030) development (see: How to position for RMB internationalisation?).  Opportunities such as RMB trade financing and asset market expansions, including RMB listings of Middle East companies and RMB derivatives hedging, are anticipated to emerge.

Re-enginerring on geo-political tension

While decoupling between China and the US persists, business ties between China and other major economies such as the EU and ASEAN remain strong. These two regions accounted for 13.3% and 15.6% of  China's total trade in 2023, respectively. Consequently, Hong Kong is poised to remain as the primary destination for these corporations. In fact, the number of regional headquarters of Germany, Switzerland, and Singapore remained largely stable since 2019.

The tense relationship between China and the US prompted Beijing to accelerate its efforts towards achieving self-sufficiency, particularly in semiconductor production. According to UN data, China emerged as the second-largest chip producer globally in 2023. Hong Kong stands to benefit from this trend, as electronics account for 70% of its exports. Emerging catalysts spanning PCs, smartphones and artificial intelligence are supporting extended growth.

The decoupling between China and the US is expected to drive regional supply-chain diversification (see: The rise of Chinese capital in ASEAN), a progress largely facilitated through Hong Kong, as evidenced by its lion share among China's outward and inward investment.

Firming up asset and wealth management

Beyond facilitating direct investment and trade flow, Hong Kong maintains its position as an indispensable asset management and wealth management center. According to a survey conducted by KPMG, Hong Kong ranks highest in almost all asset management areas, including ease of onboarding, range of investment options, and investor protection. Regulators have also been reforming fund structures, making Hong Kong a more attractive location for fund domiciliation and origination.

The expanded fund distribution network under the mutual recognition of funds ("MRF") arrangements with the Mainland, Switzerland, France, the United Kingdom, Luxembourg, the Netherlands, and Thailand allows eligible funds to be offered directly to retail investors in these markets. The profit tax exemption/concession for publicly offered funds and private equity funds has further enhanced Hong Kong's competitiveness as an asset management center. As a result, the number of Hong Kong-domiciled funds has grown by 20% to over 900 in the past three years.

Another growing opportunity lies in private wealth management and family offices. According to the Hurun Wealth Report, Hong Kong remains the most preferred overseas investment destination for Chinese high-net-worth individuals in 2022. Hong Kong is poised to benefit from the rising wealthy population in China, particularly in the Greater Bay Area (GBA). China's total number of high-net-worth families with net assets over RMB10 million increased by 2.5% in 2022, reaching 2.1 million families. Guangdong Province alone accounts for 307,000 of these families, ranking first in China. Notably, half of these families are from Shenzhen and Guangzhou. When combined with Hong Kong, the GBA is home to approximately 522,000 high-net-worth families. Recent government measures promoting family offices have set the stage for future growth. In addition to allocate HKD100 million to the sector over the next three years, the government has also introduced tax exemptions for family offices.

Encountering China slowdown

Of foremost concern are weaknesses emerging in China's weaker-than-expected recovery and lingering debt problems. This has sent shockwaves through financial markets, with Hang Seng Index plunging sharply in response in the past three years. Mainland corporations, which account for over two-thirds of the bourse's market capitalization, see their performance intricately tied to the health of China's economy.

Yet, there are some signs of stabilization from January’s monetary data and stronger-than-expected tourism data in February. The government has also been showing some urgency in supporting the macro environment through liquidity injections (see: Beyond the 5Y LPR cut) as well as calling for measures to support equipment upgrade and consumer-good trade-in upgrade.

New industries are beginning to emerge. The country's "new three" industries of solar power, electric vehicles, and batteries are poised to play a crucial role in its ongoing economic growth and global leadership in clean energy. Collectively, these sectors contributed over RMB11 trillion to China's GDP in 2023, accounting for a significant 40% of the country's overall expansion.

China now dominates these fields globally, commanding over 80% of solar cell exports, more than 50% of lithium-ion batteries, and over 20% of electric vehicle sales. Early investments and consistent government support established robust supply chains, granting Chinese companies substantial cost advantages over Western competitors in terms of economies of scale. As traditional industries slow, China is consolidating its position as the world's premier player in these strategic new sectors driving the future of green technology.

For Hong Kong, opportunities abound in fundraising, expanding trade links, providing advisory services, and attracting talent as these Chinese companies expand internationally

Engaging talents

As growth potential remains, we are not of the view that the shrinking labour force is irreversible. In fact, there are early signs that talents are returning. As of the end of 2023, the total number of Hong Kong residents is returned to over 7.5 million for the first time since the onset of COVID-19. Even after discounting for mobile residents, the number of usual residents has also recorded the first year-on-year increase since 2020.

The government's Top Talent Pass Scheme has begun to attract both Mainland and foreign expatriates to Hong Kong. According to government data, approximately 90,000 talents arrived in Hong Kong through various talent admission schemes, far exceeding the government's annual target of admitting at least 35,000 talents. Of those who have arrived, 55,000 are approved applicants of the Top Talent Pass Scheme (TTPS).

As a result, total labour force growth saw signs of stabilization. It increased by 0.5% YoY, or 19.1 thousand in Nov23-Jan24. Amongst all, working age population saw notable increase of 23.4 thousand. The returning talents are primarily engaging in professional and business services, information & communication sectors, which are the current backbone and future growth engine of Hong Kong respectively. Meanwhile, there has been a sharp rebound in the public administration workforce, which corresponds with the increasing investment in healthcare and education.

Despite Hong Kong's relatively weak labor productivity growth of 0.7% compared to the global average of 2.1% over the past five years, there are promising factors indicating a future rebound in productivity. The acceleration of digital transformation, coupled with investments in modern infrastructure and human capital, is expected to drive this positive change. Hong Kong boasts a highly educated workforce, with university graduates making up 35% of the labor force in the 3Q23 (OECD average: 33.2%). Five out of the eight publicly funded universities in the city are ranked among the top 100 in the world by the Times Higher Education.

Government spending on education increased from 2.9% in 2011 to 3.4% in 2024. Given an aging population, such data indicate an increase in education spending per student. The intelligence of the Hong Kong workforce is also reflected in their strong multilingual skills. According to the latest Use of Language Report from the Hong Kong Government, over 70% of the economically active population perceives their English and Mandarin skills as average - completely sufficient for daily use. Meanwhile, Hong Kong's native Cantonese language is essential to the Greater Bay Area (GBA) market.

In conclusion, we think Hong Kong is well positioned to weather the stormy sea ahead. With the aid from a sound legal system, Hong Kong stands to benefit palpably from channeling China’s capital flow. This includes both direct investment and asset management. The new China growth engines will also requires Hong Kong’s help in fund raising. As growth potential remains, talents outflow is not irresversible, in our view.


To read the full report, click here to Download the PDF.