China is paving the way for more money to flow into Hong Kong and shoring up its status as a financial hub.
Investors and foreign companies have been wary that Hong Kong's status as a financial hub might be eroded, as China last week went ahead to implement a controversial national security law in the city despite criticism. That has caused friction with Washington, which has said it will revoke Hong Kong's special trading status with the U.S.
Against that backdrop, China's central bank last week launched an initiative — the Wealth Management Connect — that analysts said will bring more inflows into Hong Kong, and attract foreign financial institutions to expand their business in the city.
Authorities have also stepped up to reassure investors that Hong Kong's financial hub status will remain intact.
Hong Kong's Chief Executive Carrie Lam said last month the city should be transformed into a hub for private wealth. In addition, China said recently that it will support Hong Kong's growth as a global financial center.
Last week, the People's Bank of China announced an initiative – the Wealth Management Connect, which will allow mainland investors from the much-touted Greater Bay Area to buy financial products in Hong Kong and Macau, and vice versa.
China's Greater Bay Area is a region comprising nine Chinese cities in Guangdong province and two special administrative territories — Hong Kong and Macau. That region accounts for 12% of China's gross domestic product.
Lam said that it reflected "solid backing" from Beijing and that "Hong Kong continues to play a leading role in the country's economic development and opening up of financial markets," according to Reuters.
Analysts said the move will likely bring much capital flows into the Asian financial hub.
"If you thought Hong Kong's status as a financial hub is going away, think again. Are foreign firms going to pull out before the tidal wave of money comes to Hong Kong? I don't think so," Brendan Ahern, chief investment officer of investment firm KraneShares, told CNBC in an email.
He said the news reaffirms that Hong Kong's financial hub status "isn't in jeopardy" while "providing a strong rationale for financial firms to remain entrenched" in Hong Kong.
Tommy Wu, lead economist at Oxford Economics, said: "This initiative should attract foreign financial institutions to expand their wealth management business in Hong Kong, especially given that the Greater Bay Area is one of the wealthiest regions in China."
The Wealth Management Connect will not just serve mainland residents who have a "genuine need" to expand their investments, said Wu, but also reach foreign investors, who are able to purchase wealth products sold in the Greater Bay Area.
In remarks earlier last month, Hong Kong Chief Executive Carrie Lam spoke of proposals she made to China's central government, to turn Hong Kong to deepen its role as a gateway to China.
"These proposals will revolve around this plan to make Hong Kong more international, to turn Hong Kong into a more prominent offshore Renminbi centre, to transform Hong Kong really into the hub for the management of private wealth," she said, according to a transcript of her remarks.
"By so doing, we should also be promoting greater connectivity between the Hong Kong financial markets and the mainland financial markets," Lam added.
China's decision to pass the national security law on Hong Kong has ramped up tensions with the U.S, which has a special trading relationship with the Asian city.
Last week, Washington started to take additional actions — such as halting defense exports to Hong Kong and restricting its access to high technology products.
"Despite the strong US rhetoric against the national security law, the US measures taken so far have been quite modest," Wu of Oxford Economics wrote in a report last week.
In addition, China "has an incentive" to ensure the "one country two systems" arrangement survives, and to persuade the world that system is still in place, he wrote.
Under that framework, Hong Kong, a former British colony that returned to Chinese rule in 1997, is given some freedoms that citizens in the mainland do not have. That includes self-governing power, limited election rights, and a largely separate legal and economic framework from mainland China.
"In the short term, the negative impact will not likely be visible. Inflows into Hong Kong have been very strong in recent months and will likely continue in the near term, given the IPO spree of Chinese companies in Hong Kong so far, and for the rest of the year," Wu wrote.
Listings in greater China jumped in the first half of this year, even though they declined globally due to the impact of the coronavirus. According to data from EY, Hong Kong and Shanghai markets drove up the number of deals as well as total amount raised.
In the medium term, Hong Kong will be able to leverage its role as a key gateway in and out of China, Wu wrote. Beijing is likely to continue to roll out new programs where Hong Kong will go on playing that key role, he said, with one example being the Wealth Management Connect.
Still, he cautioned that U.S.-China tensions will remain a key risk to Hong Kong, with foreign investment into the city likely to be "affected to some degree due to these ongoing uncertainties."