Hong Kong: Financial “super-connector” to the Mainland

China's Belt and Road initiative, a revival of the ancient Silk Road trading networks, covers more than 60 countries that together account for 62 per cent of the world population. The Initiative will reshape the 21st Century global economy, with Hong Kong set to play a leading role.

Underpinned by the "One Country, Two Systems" framework, Hong Kong has strong competitive advantages and is the "super-connector" linking the international community with Mainland China.

Under "One Country, Two Systems", Hong Kong boasts free capital flows and a tax-free port, effective legal and ICT systems and world-class financial institutions and capabilities.

In Hong Kong, global investors enjoy superior access to Mainland markets as well as peace of mind that comes with the city's commitment to the rule of law. Besides, Asia's world city is well-connected to countries along the Belt and Road, which jointly account for 30 per cent of global GDP and more than 30 per cent of the world's merchandise trade.

The dynamic is already playing out. Nearly half of Mainland enterprises said that Hong Kong was their preferred destination for seeking professional services outside the Mainland for capturing business opportunities arising from the Belt and Road Initiative. That is according to recent surveys of 318 Mainland enterprises by the Hong Kong Trade Development Council.

Despite being a relatively small city of just over seven million people, Hong Kong boxes well above its weight. Among other things, it is the key hub for investment in and out of the Mainland. About 60 per cent of the Mainland's outbound investment flows to or through Hong Kong. At the same time, Hong Kong serves as the conduit for around two-thirds of foreign direct investment into China, up from 30 per cent in 2005.

Hong Kong is taking big strides to cement this advantageous position – a global financial centre in China but outside the Mainland systems. Earlier this year, a new Bond Connect scheme between Hong Kong and the Mainland was launched, granting efficient access for overseas investors to buy onshore Renminbi-denominated bonds in the China Interbank Bond Market (CIBM), for the first time. This trading link initially gives access to a US$9 trillion pool of debt in the Mainland. Southbound trading will be explored in due course, which would allow Mainland investors to invest in Hong Kong's bond market.

The Bond Connect is just the latest initiative to strengthen financial links between the Mainland and Hong Kong, which has served as a testing ground for the liberalisation of the Renminbi for more than a decade. In 2014, the ground-breaking Shanghai-Hong Kong Stock Connect was launched, giving international investors unprecedented access to the Mainland's stock market. This was followed in 2016 by the Shenzhen-Hong Kong Stock Connect. Both cross-boundary investment channels marked Beijing's most liberal stance yet on its capital market rules. While the Shanghai bourse offers many blue-chip companies, Shenzhen is dominated by technology start-ups. The Belt and Road Initiative will further drive the internationalisation of the Renminbi, which will likely encourage more cross-border investment.

The city continues to be an excellent launch-pad for initial public offerings (IPOs), due to its depth of liquidity and the quality of its financial services providers. About 50 per cent of companies listed on the Hong Kong Stock Exchange are Mainland Chinese companies that account for 65.4 per cent of total market capitalization as at August, 2017. Last year, Hong Kong was ranked as the world's top IPO exchange, raising a total of US$25.1 billion from 126 IPOs.

In addition, the exchange in Hong Kong has recently conducted a consultation on establishing a new board to attract companies from New Economy sectors, separate from the Main Board and smaller "sister" bourse, the Growth Enterprise Market (GEM). A listing in Hong Kong can offer companies involved in the Belt and Road Initiative a way to raise funds while also raising their profile among major Belt and Road stakeholders.

With financial connectivity and infrastructure connectivity being major themes of the Belt and Road Initiative, a priority area will be raising the capital required to take forward this grand vision. In a recent report, the Asian Development Bank estimates the annual infrastructure investment requirement in Asia between 2016 and 2030 will be around US$1.7 trillion. That is about double the current infrastructure investment level in the region.

This summer, Hong Kong became one of the 80 members of the Asian Infrastructure Investment Bank (AIIB), the US$100 billion lending institution set up to support the building of sustainable infrastructure in the Belt and Road economies. Hong Kong's Financial Secretary Paul Chan commented that the city's accession to the AIIB will be mutually beneficial: "Hong Kong's professional services and financial services sectors can certainly contribute to the success of the AIIB, while Hong Kong's participation in the AIIB can also create new opportunities for the relevant sectors," he said.

The Infrastructure Financing Facilitation Office (IFFO) set up by the Hong Kong Monetary Authority in July last year stands ready to work closely with key industry stakeholders including over 70 IFFO partners in facilitating infrastructure project investments and financing.

Without doubt, Hong Kong's future is bright as the "super-connector" and facilitator for economic growth in the 21st century, building bridges between Mainland China, other Belt and Road countries, and the rest of the globe.