Stewart Aldcroft, Hong Kong resident, veteran of the Asian asset management industry and member of the FBC Advisory Council.
2023 has been an amazing year, looking back at it from Hong Kong. At the start of the year our borders were still closed to non-resident visitors, yet by March we were almost fully reopened to tourists and business visitors from all over the world, especially China.
For the year as a whole, visitor numbers may still be below around 70% of the pre-covid level, but the rate of increase each month suggests 2024 could be a record year.
Global leaders gather
The effect of visitors on the Hong Kong economy, whether on business or for leisure, is substantial. The Hong Kong Government continues to organise events, and initiate other related activities that, in their view, will support and grow the economy.
For example, the second (annual in future, possibly??) Global Business Leaders Forum was held in mid-November, bringing into Hong Kong 300 senior members of the banking, asset management and financial services industries, of whom 90+ were the CEOs or Heads of the business. Hong Kong Airport was packed with more private jets than ever before. One of the hotels in Wanchai was filled with pilots and cabin crew from these jets for three days.
The three day “talk fest” centred on how Hong Kong continues to be the connectivity centre for China (more about that later), and how China continues to provide maximum support for Hong Kong to maintain and grow its economy. Of course, this is stuff we all know, but I suppose it is quite nice to hear the Heads of major banks and asset managers agree on it, even if it still doesn’t seem to lead to improvements in our stock market performance. All this comes at a time when the property market in China, which represents 20%+ of the economy, is struggling under a proverbial mountain of debt, by some estimates, exceeding US$600bn. A consensus of opinion however, is that if the property company debt issue can be sorted, then the Chinese economy looks set for a good run. This could be 2H24.
Energising the evening economy
The second major initiative the Hong Kong Government is pushing, is to boost the night-time economy in a promotion they have called “Hong Kong Night Vibes”. Thus, street markets, restaurants, bars and other after dark activities are being encouraged. Since covid, and coming as a surprise to many, the famous Lan Kwai Fong bar area, and many restaurants around town, are relatively empty in the evenings. People have not resumed frequenting these places at night, although for lunch it can often be a challenge to book a table less than four days before. The Government wants us to go out at night more often. Naturally, Halloween on 30/31 October was well supported. I suspect the Christmas Party season might return after a three-year absence due to covid. But given the numbers working from home, it remains to be seen how well supported these will be.
Regulation development
There has been a lot of talk about developing regulations to allow crypto funds, or tokenised investment. Initially the Hong Kong Securities and Futures Commission (the Regulator) seemed keen to get something out early, to try to be ahead of Singapore, but following the impact of the collapse of a crypto exchange where many hundreds of investors in Hong Kong lost large sums of money, the HK SFC is now going a bit slower, quite rightly, with a wait-and-see approach, leaning a bit on IOSCO and what other regulators around the world do.
Mutual fund sales have begun to pick up, with fixed income and high yield products popular with investors. The absence of any sustained period of growth for the Chinese equity market and as a consequence the Hong Kong market also, has dampened investors’ enthusiasm. This has been the case for a few years now and doesn’t look likely to change in the short term. There is the appearance of China and Hong Kong stocks now having a contra-cyclical track record to that of the US in particular, somewhat similar to how the Indian stock market behaved in the early 2000s.
Despite these somewhat gloomy circumstances, the Hong Kong Stock Exchange has recently announced plans to set up exchange access to mutual funds, initially on a B-2-B basis, with the objective of enabling broader access for end-investors and for smaller fund companies to be given a better opportunity to win market support. This is the third time the Exchange has attempted to set up this type of facility. Both previous occasions failed to materialize. The Australian Stock Exchange (ASX) set up mFunds almost 10 years ago, but that has not achieved the level of success expected. Recent reports have indicated that ASX is looking to wind it up. As this is the same area in which ETFs operate, and with more than 170 ETFs already in the market, it remains far from clear why this initiative has been started now and who would support it.
Connecting China
As noted above, Hong Kong likes to consider itself the conduit to enabling access to China. In the financial services world, there are multiple access schemes, some under the “Connect” label. These include Stock Connect, Bond Connect, ETF Connect and most recently Wealth Management Connect. Often, once a scheme has been launched, it can take quite a long time before amendments or improvements are made to it, usually due to the Chinese side being unwilling or unable to allow change.
One of China’s major concerns has also been that these schemes can be used by wealthy individuals to export their capital, despite the fact that China does have multiple trillions of dollars in reserves. The Hong Kong financial services industry has been waiting with baited breath, for changes, invariably not getting all that it asks for.
Wealth Management Connect, which operates in the Greater Bay Area of China, has recently been slated as next up to get upgrades. The potential for this scheme, which allows the 70 million GBA residents to invest directly into a select number of Hong Kong domiciled funds and products (as well as for Hong Kong residents to invest into China products), via their banks, has spawned a significant increase in bank recruitment for their wealth management teams. They will need WMC to be upgraded if they are to get a good return on their investment in more sales teams.
One very notable development observed in the last few months, has been the increase in face-to-face communication between senior US and Chinese politicians. This culminated with another meeting between Presidents Joe Biden and Xi Jinping in San Francisco in mid-November. China and the USA need each other far more than either side is prepared to admit. As the two largest economies in the world, they represent a massive proportion of the global economic engine. They have many differences of opinion about multiple issues, but they also have many similar opinions that are often lost in the rhetoric.
First past the post
I have written before about the extent of competition between Hong Kong and Singapore to win family offices being set up in their respective locations. In recent months, Singapore has been scoring a few “own goals”, with the revelation of a US$2bn money laundering scandal using a Singapore family office, by a number of Mainland Chinese. The latest “own goal” has been the news that the time now required to simply get regulatory permission to set up can now stretch to as much as 18 months, in part to allow for due diligence to be carried out and avoid money laundering. This has been “music to the ears” of those in Hong Kong competing for this business. As with everything else in Hong Kong, speed is of the essence when getting started.
Finally, may I take this opportunity to wish Seasons Greetings, Merry Christmas and a Happy New Year to all readers and to hope you have a very pleasant time for the holiday period at the end of December, beginning of January. And for February, it will be Chinese New Year and another round of greetings.
Stewart Aldcroft
