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Newsletter | Articles
  Hong Kong’s Evolving Financial Integration with Mainland China
Hong Kong’s financial and capital markets continue to grow rapidly. The jurisdiction has become a world-leading fundraising centre, derivative markets have taken off and its equity markets have broadened and deepened. The growth in fixed income products has been modest along with the growth in currency. This growth reflects Hong Kong’s financial integration with China, according to an IMF report.
Hong Kong’s relationship with China has developed owing to three key aspects:
- The equity fundraising process via initial public offerings (IPOs)
- The two-year-old Renminbi (Mainland China currency) business
- The Qualified Domestic Institutional Investor (QDII) scheme – which also points to a more diversified mix of financial intermediation activities in the future
However, rapid market development and strengthening Hong Kong’s role as a regional financial centre does present some challenges. The jurisdiction faces competition from aspiring financial centres and although Hong Kong’s role as an offshore financial centre seems secure there are uncertainties about the future. Much will depend on the pace at which the Mainland opens its capital account, whether the Mainland will need an offshore financial centre as it modernises and whether Hong Kong can become a global financial centre and not Mainland-centric and equity heavy.
- Hong Kong is the top IPO fundraising centre in the world. Since IPOs launched in Hong Kong in 2004 US$67 billion has been raised, about four times the total in the previous three years. Overall market turnover in Hong Kong ranks fourth in Asia behind Tokyo, Seoul and Australia and 14th in the world. The recent IPO wave has been spurred by Mainland enterprises. Hong Kong is the main offshore listing venue for all major Mainland enterprises. In 2006 90 per cent of IPOs were related to Mainland companies.
- The launch of Renminbi business in February 2004 marked a milestone in the development of the Hong Kong financial system. Renminbi deposits rose steadily for 1½ years after it became widely accepted in 2003, but levelled off at more than US$2.5 billion and constitute only a fraction of the local deposit base. Renminbi deposits currently account for 0.5 of 1 per cent of all deposits in Hong Kong.
- The QDII scheme allows financial institutions to invest in offshore markets, such as securities and bonds. It is a transitional arrangement which provides limited opportunities for domestic investors to access foreign markets when a country/territory’s currency is not traded or floated completely freely and where capital is not able to move in and out of the country completely freely.
Hong Kong’s main challenge is to maintain its role as the “middle man” between Mainland China and the rest of the world. To do this the authorities have outlined a financial development strategy, which builds on the notion that Hong Kong’s relatively efficient financial system can be utilised to improve the Mainland’s financial system.
For a number of reasons, Hong Kong’s financial development remains relatively unbalanced. It is quite dependent on the Mainland and in terms of asset classes Hong Kong has a heavy concentration in equities and related derivative products. Fixed income and currency markets are relatively small.
Broadening the types of financial activities undertaken in Hong Kong is needed. Efforts could be made to further facilitate the listing of companies outside Greater China.
For more information on Hong Kong and China entities contact Deborah Annells.
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