Hong Kong - Is it a Rival or a Partner to the UK Capital after Brexit?
Quitting the single market and customs union with EU, London sets a ground for major banks to focus their shift to Hong Kong. Once the colony of the UK, Hong Kong now prospers at a rapid pace under the shade of pan Asian emerging markets. With Chinese regulation remaining stringent for foreign direct investments, Hong Kong is attracting multinational giants to set up their offices in one of the richest business hubs in the world.
Meanwhile, Hong Kong is getting prepared actively to beat European major cities in attracting bigger resources. Bearing in mind that Singapore can have a technological advantage to take away another big portion of deals. Back in April 2017, Hong Kong Monetary Authority initiated a consultation on a new regulatory regime for derivatives. Right now, UK trades almost 40% of the world’s $3trillion a day interest rate derivatives market. It’s also on the move of developing complex models of financial instruments. Global investors hope that Hong Kong will take a lead in trading bonds and other assets in the nearest future.
Hong Kong is positioning itself
Surely, Hong Kong has a strong position in the global market environment with quality supervision. It operates the world’s fourth largest stock exchange and currency market, not to mention that almost half of China’s outward direct investments are settled via HK. Hong Kong prides in well-established regional ties. Two of three largest global banks in Asia - Citigroup and HSBC - operate from the city.
The authorities welcome more multinational firms to land in the city. Recently, it has attracted billions of dollars by hosting Asian life insurance companies. The city targets to become a platform, where western financial innovation blends with China. Large Chinese Fintechs, Ant Financial and Tencent, have already outlined their prospects with Hong Kong. The city now plans to amend its legislation to allow firms with dual-share classes to list. This step will also tempt startups to pour capital into the city.
Since 2012, following the Olympic Games, London has consistently taken the lead in soaring real estate market prices. However, over the past few years, Hong Kong has risen steadily to take up the top of the charts this year. A couple of nine-figure sales make the city residents vow, but it’s the side effect of the city’s huge success.
Where do banks move?
Morgan Stanley is planning to move its Asian-Pacific trading to the grounds of Hong Kong. Several other investment banks are also gearing up the process to leverage their banks’ interests. Apart from HK, Frankfurt, Paris and Dublin are still in the view to service EU-based clients. For example, HSBC plans to shift a part of its trading activity, generating 20% revenue for London bank to Paris. Morgan Stanley, Citigroup, and Standard Chartered have opted for the expansion to Frankfurt. This way the banks hope to balance the aftershocks of Brexit event.
Four UK banking groups operate in Hong Kong. Their assets comprise approximately 30% of market share in the Hong Kong banking sector. As of 2016, the Hong Kong banking sector’s claims on the UK accounted for 5% of its total assets. And London currently maintains the crown of the world’s number one financial center leaving behind New York and Hong Kong coming the third, according to the Global Financial Centers Index. Can “soft” or “hard” Brexit change this ratio in favor of Hong Kong?
Bank executives are in the early stage discussions now how to split the capital to move it to a more efficient global banking center. They are still on a hold to see how UK’s new trading agreement will be finalized with the EU. They anticipate their Brexit split deals to reach $500 million each.
Can London feel the shock?
Being a financial gravity center, London attracted huge investments via London Stock Exchange. By 2013 over 40% of the global forex trading was conducted in the UK. Soon it will leave the EU block before early 2019 deadline, which can inevitably harm the UK-based financial institutions business performance for the EU markets. To note, more than a third of the UK’s financial services gains come from trade within the EU. Now the country is under the threat of losing jobs in the financial sector.
London has projected to create favorable immigration rules for EU citizens. It is optimistic in retaining the status as the cultural and commercial capital of Europe. However, Brexit’s upheaval has already showed its impact on the net migration indicator highlighting that fewer foreigners give their preference to the UK as a home destination. Lower immigration of skillful labor can play its crucial role in science-based industries. It’s true, that they can adjust over time, but short-term shocks can be apparent, as they can’t train employees overnight replacing a million European nationals choosing to go back.
Asian investors flying back to the UK
On the other hand, Asian investors rush to London for a trophy hunt. With weaker GBP, London property becomes more appealing in the eyes of affluent Asian billionaires. During the third quarter of 2017, over 60% of £4.8bn deals invested in London offices came from Asian buyers. Currently record amount of 90% commercial property investments originates from overseas. The most astonishing deal in July was the “Walkie Talkie” skyscraper acquisition deal by a Hong-Kong-based resident for a record-breaking £1.3bn.
Through diversification and parking their capital in the safe shores of the UK, Hong Kong and Chinese investors also aim to derive cash from the country. London currently has over 8 million population, with 3 million residents who were born outside of the UK. Being in the crossroad of geographical channels and bridging the Silicon Valley with EU and Asia, it has long been a multicultural hub attracting financial and scientific giants. Thus, commercial property ensures relatively good return on investment by inertia in the context of favorable legal system and tax conditions.
While European expats are still wondering for a while whether Dubai, Singapore or Hong Kong could be a more fertile land for a new settlement, the capital has wings to fly. Hong Kong will further embrace free trade and take a stance of being open for business to the rest of the world.