Hong Kong: China’s Financial Gateway To The World

Two cross-boundary connect schemes cement its status as a super connector for Mainland China and international markets.

As the most important gateway to China, Hong Kong is constantly strengthening its connectivity to enhance cross-border transactions. With its free port status and an autonomous customs territory, the city is building financial linkages across Guangdong, Hong Kong and Macau, which together comprise the Greater Bay Area (GBA).

Hong Kong facilitates about two-thirds of China’s inbound and outbound foreign direct investments and provides a channel for the global trade of Chinese goods and services. The financial hub has helped boost the international usage of renminbi (RMB), which is now the world’s fifth most active currency, accounting for 2.2% of international payments as of August, data from Swift shows.

Banks in the city currently handle 75% of RMB flows around the world and that figure is poised to grow with China and Hong Kong promoting cross-border RMB investments and financing activities. Mainland enterprises are also issuing green and sustainability related products in Hong Kong, aiming it to become a hub for green finance within the GBA.

“Different stakeholders have been engaging in conversations and preparatory work to enhance Hong Kong’s connectivity as well as standards of financial services and product offerings,” says Laurence Li, Chairman of the Financial Services Development Council (FSDC), a high-level cross-sectoral advisory body set up by HKSAR Government in 2013 to promote Hong Kong’s financial services industry. “With some favourable measures being introduced and implemented in an orderly manner, the industry believes the ever-improving connectivity of financial markets will lead to uncharted market potentials.”

Capturing Opportunities

To help Hong Kong’s financial services industry capture market opportunities in the GBA, the FSDC has recommended and advocated for connecting cross-border payments and transfer infrastructure; enhancing the convenience of remote account opening procedures; and fostering cross-boundary mortgage financing, insurance and wealth management businesses.

The recently launched Wealth Management Connect scheme will help mainland investors diversify investment portfolios through exposure to overseas markets via retail funds domiciled and regulated in Hong Kong, while attracting offshore investments to onshore wealth management products in Mainland. It will also allow Hong Kong investors to broaden their mainland exposure.

Accelerating Internationalisation

Coming after the Hong Kong stock connect with Shanghai in 2014 and Shenzhen in 2016, the scheme will deepen the linkages between the two markets. These significant developments in the liberalisation of China’s capital markets would accelerate RMB’s internationalisation and strengthen Hong Kong’s position as a global offshore RMB hub, KPMG said in a recent note to clients.

The new southbound leg of China’s Bond Connect programme will further stimulate demand from mainland Chinese investors for Hong Kong and U.S. dollar-denominated bonds, boosting liquidity and facilitating a more efficient price discovery process. It could also broaden the investor base for both Hong Kong dollar and offshore RMB bonds.

The constant improvement of Hong Kong’s financial market linkages to China will help establish the territory as the future hub for fintech and digital assets across the GBA. As more cross-border products and services become available, Hong Kong will steadily march towards its vision of becoming the world’s premier wealth and asset management centre.

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