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In recent weeks, Hong Kong has been hit by a chain of events some fear poses an existential threat to the city’s status as Asia’s leading financial center.
The new national security law, imposed by Beijing, grants China’s central government sweeping authority to surveil, interrogate, fine, and imprison individuals deemed a danger to national security and has cast a chill over culture and society in this freewheeling city.
The Trump administration, decrying the law as a breach of Beijing’s promise to allow Hong Kong a “high degree of autonomy” after the territory’s 1997 return to mainland sovereignty, has revoked Hong Kong’s special trade and tax relationship with the U.S. Trump has threatened sanctions against Chinese officials implementing the law and any firms that support them; Beijing vows to retaliate in kind.
The U.S.-China tussle over the city has spooked global banks and businesses operating here. A survey released this week by the American Chamber of Commerce in Hong Kong found that 76% of respondents are “somewhat concerned” or “extremely concerned” about the legislation, with 30% saying they’re considering moving assets or staff out of Hong Kong in the medium- to long-term future.
American tech companies including Facebook, Google, and Twitter have hinted they’re prepared to pull out of Hong Kong. On Wednesday, The New York Times announced plans to relocate its digital news operations for Asia from Hong Kong to Seoul.
Lawmakers in Britain, Australia, Taiwan and the U.S. all have proposed measures to take in Hong Kongers as refugees, potentially draining the city of talent. Meanwhile, Beijing has announced plans to tax Chinese citizens on their global income, a move that could increase the tax rates of many mainland bankers in Hong Kong from 15% to 45%, further fueling talk of “brain drain” from the city’s financial industry.
So is Hong Kong finished as Asia’s financial hub?
Mark Clifford, executive director of the Hong Kong-based Asia Business Council and former editor of the South China Morning Post, warned in that newspaper this week that Hong Kong “risks an accretion of damage to its international standing from people in a party who don’t understand that institutions of free press, a strong and uncorrupt civil service, and an independent judiciary system are fragile objects…” The city, he argues, stands “in danger of seeing its traditional role as a portal between China and the rest of the world destroyed.”
But I’m not so sure.
As we’ve reported in Fortune, U.S. lawmakers’ effort to chase Chinese companies off U.S. stock exchanges is likely to prove a multi-billion dollar bonanza for Hong Kong’s financial industry. There are myriad ways Beijing can channel capital and investment banking deals to the city.
And, as American Chamber of Commerce president Tara Joseph acknowledged in an Eastworld Spotlight conversation with me this week, it’s hard to imagine another city in the region capable of snatching away Hong Kong’s crown.
Singapore, most frequently touted as Hong Kong’s heir apparent, is comfortable and cosmopolitan. It offers a British-style legal system and English is widely spoken. But it’s a five-hour flight from the nearest Chinese city. And the total market capitalization of Hong Kong’s exchange, about $5 trillion, is six times that of the Singapore exchange. Hong Kong attracted 161 initial public offerings and first-time listings amounting to $40 billion last year, while Singapore drew 11 deals worth $2 billion.
Arcus Research analyst Peter Tasker argues that “the most obvious candidate” to replace Hong Kong as Asia’s financial hub is Tokyo. I agree. Tokyo is capital of the world’s third-largest economy, home to the largest pool of pension assets after the U.S., and a leading source of foreign direct investment. It helps, too, that the yen is the most-traded currency after the dollar and the euro.
I worked for the Wall Street Journal in Tokyo in the go-go years of the early 1990s when no one questioned that city’s financial pre-eminence in the region, and I chronicled the beginnings of its spectacular demise. So I’m intrigued to see that Japanese Prime Minister Shintaro Abe’s Liberal Democratic Party is drafting a plan to revive Tokyo as a financial hub. Recommendations include relaxing banking regulations and developing a stock-market link to China similar to the Shanghai-Hong Kong Stock Connect program. Another positive sign: the Financial Services Agency this week tapped Ryozo Himino, a veteran regulator and former secretary-general of the Basel Committee on Banking Supervision, as its vice minister of international affairs.
But any bid to create direct trading links between Tokyo and exchanges in Shanghai or Shenzhen would require the support of Chinese financial regulators, as would efforts to increase the number of Chinese companies traded on the Tokyo exchange. Why would Beijing help Tokyo dethrone Hong Kong as Asia’s financial center?
Japan’s biggest problem is tax. Abe has cut Japan’s corporate tax rate by about 10 percentage points to about 30% in recent years, but that’s double what businesses pay in Hong Kong. And Japan has increased the top tax rate for personal income to 55%, more than triple the rate in Hong Kong. Capital gains, which aren’t taxed in Hong Kong or Singapore, are treated as income in Japan. As Tasker admits, it’s hard to imagine that Abe will be able to sell Japan’s equality-loving voters on the idea of dishing out huge tax breaks for rich bankers and big foreign firms.
More Eastworld news below.
Clay Chandler
clay.chandler@fortune.com
This edition of Eastworld was curated and produced by Grady McGregor. Reach him at grady.mcgregor@fortune.com.
Eastworld news
Travel ban part two
The U.S. is considering a travel ban on 92 million members of the Chinese Communist Party, a policy that may exclude 270 million Chinese citizens from entering the U.S. if family members are included. In a draft of the order, the Trump administration is also mulling revoking visas for party members currently in the U.S. even though the U.S. does not have a mechanism in place for identifying active CCP members. If enacted, the “broad ban would be the most provocative action against China by the United States since the start of the trade war between the two countries in 2018,” writes the New York Times.
Grabbing for straws
Grab, the Singapore-based ride hailer active in eight countries across Southeast Asia, is facing twin existential problems: a lack of taxi-riders and dried-up funding sources amid the pandemic. As recently as 2018, the company was championed for its success in driving U.S. ride-hailing giant Uber from the region and has obtained $10 billion in investments since launching in 2014. The company’s food-delivery business has grown during the pandemic, but these gains may do little to make up the lost revenues in other areas of its business. Grab has long been unprofitable, but the pandemic may determine whether Singapore’s tech giant can survive for the long haul. Southeast Asia Globe
Holding the fort
In 2008, Huang Guangyu, the trash collector-turned-billionaire founder of GOME Electrical Appliances, was arrested for bribery and insider trading and sentenced to 14 years in prison, an unusually harsh sentence in China for white collar crime. At the time, his wife, Du Juan, told him that “when you return, I will give you a better GOME,” and took the reins of the appliance empire. She faced a steep challenge in trying to right the ship of the recently disgraced firm but managed to hold steady in appliance sales, expand into areas like real estate and telecoms, and attract hundreds of millions from e-commerce giants like JD.com. Huang was just released from jail in June a few years ahead of schedule because of good behavior, which sent GOME shares skyrocketing on Hong Kong’s stock exchange. Sup China
Hong Kong Autonomy Act
Chinese and foreign banks in Hong Kong are on high alert after U.S. President Donald Trump signed the Hong Kong Autonomy Act into law on Tuesday. The law sanctions individuals, entities, and financial institutions that are involved in the “erosion” of Hong Kong’s autonomy. In the weeks preceding the law’s passage, numerous Chinese and foreign banks prepared contingency plans and reviewed their client bases to identify customers who may be targeted by the U.S. sanctions. Yet complying with the potential sanctions may also mean violating Beijing’s new national security in Hong Kong, which has the power to imprison those found to be colluding with foreign powers. Fortune
Coronavirus by country (or special administrative region)
Life had basically returned to normal Hong Kong in recent weeks. Bars were full, beaches were packed, and morning subway commutes had returned to crowded pre-pandemic levels. Yet after months of almost no local virus transmission, the city of 7.5 million residents has recorded a spike in over 200 cases in the last week. There has been a steady rise in cases in Hong Kong via travelers returning to the city from abroad, but authorities have struggled to determine the source of the new outbreak, forcing the government to reinstitute social distancing measures like restaurants restrictions, gyms and cinemas closures, and work-from-home schemes. In total, Hong Kong has recorded 1,589 confirmed cases of the virus since the onset of the pandemic in January, fewer than state-wide totals in 47 of the 50 U.S. states. Yet Hong Kong shows that even when the virus appears to be stamped out, it finds a way to re-emerge. South China Morning Post
Markets and movers
Jio Platforms – On Wednesday, Google announced that it will invest $4.5 billion to take a 7.7% stake in Jio Platforms, the telecoms and digital arm of the Indian conglomerate Reliance Industries Limited. Google also announced that it will work with Jio Platforms to build a new affordable phone for the Indian market. Fortune
Luckin Coffee – There is a mystery as to who is in charge at the Chinese coffee chain after co-founder and former chairman Charles Lu lost control of his shares following a recent court ruling. The company, which was found to have been fabricating its financial results four months ago, has now called in liquidators to oversee a corporate restructuring in an attempt to salvage its business. South China Morning Post
Flipkart – The Indian e-commerce giant, now valued at nearly $25 billion, raised an additional $1.2 billion in a funding round led by Walmart, Filpkart’s majority stakeholder. As Flipkart aims to expand its presence in India’s booming e-commerce market, the company faces stiff competition from Amazon and JioMart, which is backed by Facebook and Google via Jio Platforms. Deal Street Asia
Huawei – The U.K. decided on Tuesday that it will block Chinese telecom giant Huawei entirely from building its 5G network, tearing up earlier plans that would have allowed Huawei to construct non-sensitive portions of the 5G infrastructure. South China Morning Post
Bytedance – The embattled owner of Tiktok has plans to expand in China, and will resist pressures to sell its U.S. operations amid calls to ban the app in the U.S. The U.S. Senate is likely to vote on a bill soon that would ban Tiktok on devices issued by the U.S. government. The Information
Final figure
3.2%
China’s economy is growing again. On Thursday, China released second quarter GDP figures that showed its economy grew by 3.2% in comparison to the same period last year. The rate exceeded forecasts and marks a rapid turnaround from the country’s performance in the first quarter, when GDP fell by 6.8% amid lockdowns imposed during the pandemic. Still, China’s economy remains far from its pre-pandemic growth rate of around 6.1%. Retail sales fell by 3.9% in June in comparison to the previous month signaling that Chinese consumers are struggling to return to pre-pandemic confidence levels. Fortune