In June 1995, one year ahead of Hong Kong’s transfer of sovereignty to China, Fortune magazine titled its cover story “The Death of Hong Kong”. Two months ahead of the handover, Fortune printed on its front cover a graphic depicting a pair of red chopsticks picking up a pearl; a not-so-subtle implication of Beijing’s upcoming control of the ‘Pearl of the Orient’.
Anxiety and fear was mounting over how the state of Hong Kong’s freewheeling capitalist system would fare under Beijing’s rule. The New York Times in 1996 forewarned, “every step toward the transfer of Hong Kong…is a sombre reminder that after the recent liberation of so many countries from Communism, a vibrant and relatively free society is soon to be swallowed up by a Communist dictatorship.”
For years after the handover, it appeared as though all the negative international publicity on Hong Kong’s future under Beijing was exaggerated and alarmist. The semi-autonomous city leveraged its lucrative and well-networked connections with the mainland, and piggybacked off China’s rapid economic growth.
Chinese companies listed on the local stock exchange, one of the world’s largest, and multinationals continued to base regional headquarters in the city to capitalize on its proximity to China. Hong Kong was able to credibly tout its reputation as “Asia’s World City”.
Importantly, China dared not fiddle with Hong Kong’s independent legal system, established by the British during colonial days that amplified the city’s commercial attractiveness. The Special Administrative Region’s (SAR) free media, civil society, and education system were also left relatively untouched – all of which still stand as crucial and complementary to the ever important financial sector.
However, in June 2020, Zhongnanhai imposed the draconian National Security Law, bypassing Hong Kong’s legislature. The law’s implementation, which has since been invoked to jail perceived opponents of local and central governments, silenced local critics, and promoted mass self-censorship, had fulfilled the Western prophecies made in the early 1990s.
Looking back to Fortune’s 1995 article, the authors had correctly predicted, “the naked truth about Hong Kong’s future can be summed up in two words: It’s over.” As accurate as this statement stands, it does not fully encapsulate Hong Kong’s current situation however.
A new leader, a new direction
As Carrie Lam Cheng Yuet-ngor, the city’s Chief Executive during the 2019-20 social unrest and most of the pandemic, declined to seek a second term, John Lee Ka-chiu was “elected” as the leader in a one-horse race. Lee, with a background as Deputy Commissioner “Asia’s [former] finest” police force, and role as the former security tsar of the city during the protests, had won 99 percent of all votes casted in the race.
Lee’s appointment also signals that China continues to approach Hong Kong’s governance through a prism of security, as opposed to assuaging the business community’s concern towards the city’s attractiveness. Undeniably, this rejigging of Hong Kong will negatively impact the city’s position as an international financial center, potentially robbing it of this title.
A financial center with Chinese characteristics
The end of Hong Kong as an international finance hub does not point to the end of the city’s importance. Many around the world still view the territory with optimism, especially for its ever-growing nodes with the mainland. Most notable is the Greater Bay Area (GBA), with a combined population of over 85 million people across nine Guangdong province cities on the mainland and the SARs of Macao and Hong Kong.
This mass conglomeration of urban and population centers provides Hong Kong with a vast interconnected market for the city’s businesses to expand and diversify into, offering significant opportunities for collaboration and innovation. Multinationals and foreign firms may use Hong Kong as a launching pad into the mainland.
Despite crackdowns on the independent judiciary, Hong Kong’s commercial legal infrastructure remains relatively untouched. Given the numerous legal and regulatory restrictions foreign firms face in China’s domestic legal and financial systems, the territory still retains certain competitive advantages in the short-term. But this has not changed nor stemmed the flow of Hong Kong’s haemorrhaging of regional headquarters.
Covid measures, in place for over three years, have led to a mass exodus of foreign and local professionals, the departures of multinationals, and the repulsing of potential incoming talent. As a case in point, nearly half of all European businesses in Hong Kong considered relocating in 2023, according to a EuroCham report. Of the companies intending to depart, 25 percent have expressed their intention to permanently relocate, whereas 24 percent are considering a partial move. A mere 17 percent of the firms have signalled that they have no plans to relocate whatsoever over the next 12 months.
The city’s statistics department has also found that American companies had 254 regional offices based in Hong Kong in 2021, down from 290 in 2018. Similarly, Japanese companies dropped from 244 to 210 in the same period. Overall, Hong Kong’s hosting of regional headquarters have fallen from 1,530 in 2021 to 1,457 in 2022, a 4.7 percent decline.
Many firms have chosen to move to other Asia-Pacific competitors, such as Singapore and Seoul. Compared to Hong Kong, the Lion City has a more stable and predictable commercial and political environment, combined with a more adept political leadership and strong rule of law. Although Singapore is not known for its personal and political freedoms, observers noted that financial, commercial and trade matters can be discussed much more candidly and openly.
With Western headquarters out, mainland companies have moved to the city to fill the gap, changing Hong Kong’s cosmopolitan landscape to one dominated by Chinese companies and professionals. In 2018, there were 197 mainland firms based in the SAR, and by 2021 there were 252 such offices. By 2022, Chinese companies outnumbered their American counterparts in Hong Kong.
While Fortune magazine and others may have exaggerated claims about the “death of Hong Kong”, the city has merely, albeit unwillingly, changed from a global financial hub to a Chinese-centred, Chinese-controlled, and Chinese-oriented city. This shift in Hong Kong’s character is to be expected as Beijing marches forward in recrafting the SAR’s financial sector into its desired shape: one that serves China’s purposes and interests in a post-Covid and hyper-competitive world.
[Image by Marci Marc / Pixabay]
The views and opinions expressed in this article are those of the author.
Samuel Ng is a Westpac Asian Scholar currently at the National Chengchi University in Taipei, Taiwan undertaking units in Taiwanese international relations and political history. He is in his final year of a dual Bachelor of Laws (Honors) and International Business at the Queensland University of Technology in Australia.