On September 25, the Asia Leaders Series hosted Bernard Charnwut Chan, President of Asia Financial Holdings, and one of ten individuals to hold a high-ranking political position in both China and Hong Kong. Chan — who was appointed by Carrie Lam in 2017 — provides an in-depth look into the current and future relationship between Hong Kong and China in the third event of the 2018 Asia Leaders Series in Zurich.
Chan offers an impactful insight in his talk by explaining how, “[his] role in Hong Kong does not cross the border,” and vice versa. He serves as both the convener of the Non-official Members of the Hong Kong Executive Council and as a Hong Kong Deputy to National People's Congress of the People's Republic of China and thus, can speak on socio-political affairs between the regions with an accuracy seldom found in outside sources.
Hong Kong lies at the heart of one of Asia’s most active regions. A peg of its currency to the US dollar ensures currency stability, whilst the strong economic relationship with China has secured it as a focal point of the global economic machine. Despite optimistic outlooks, Hong Kong has found itself in a uniquely-complex situation; dealing with a two-system political structure that acts as a potential roadblock in the long-term progress of its economy.
Caught between varying political agendas, a divided social outlook on cultural assimilation, and one of the most promising economic growth opportunities of our time, Bernard Chan delivers an exceptional speech on the current situation in Hong Kong.
Amidst China’s consistent economic growth has come an increase in foreign investment. Chinese enterprises face a rising need for opening new markets and expanding operations, not only within the rapidly-developing ASEAN economy, but also westward into the Middle East and Europe.
Hong Kong has been playing an important intermediary role in regards to China’s global expansion. “Hong Kong is able to play the middleman in the Belt and Road Initiative (BRI)— a $900bn infrastructure project that aims to connect China to the rest of the world — by allowing capital to flow freely through it.”, explains Chan.
Along with the Belt and Road Initiative, Beijing has also embarked on a promising regional transformation plan, referred to as the Guangdong-Hong Kong-Macau Greater Bay Area. The project connects 11 cities, 68 million citizens, and is comparable to the world’s tenth-largest economy. It is home to 15 Fortune-500 companies generating almost $1tn USD in revenue — with projections of having overall output of the region nearly double to $2.8tn by 2025. The Bay Area is already a global leader in finance, insurance and technology.
Hong Kong lies at the heart of this initiative and aims to benefit from long term growth in China by providing a simple and predictable tax regime paired with an independent, experienced judiciary in order to help connect China with the rest of the world. The most common form of outbound Chinese investment through Hong Kong comes via IPOs, where, in 2017, 50% of the listed companies on the Hong Kong Stock Exchange (HKEX) were Chinese enterprises. Furthermore, as of year-end 2017, Chinese companies accounted for $98.2bn HKD in IPO funds raised, a staggering 77% of the HKEX.
Moreover, the Hong Kong IPO market has continued to post record-breaking numbers through 2018 and is on-track to reclaiming the top-spot for most funds raised in the global IPO market. According to the 2018 PwC interim review and forecast of the HKEX , there were a total of 108 new listings in the first half of 2018 — a 50% increase from last year. Infrastructure and Real Estate companies remain lead in terms of number of listings, whilst the financial services sector remains the largest contributor of funds raised. Outlooks are pointing towards more listings of Media and Technology firms for 2018 and beyond, many of which are Chinese-based enterprises.
Projections for the HKEX are indeed very optimistic; not only is it one of the top 5 global exchanges in terms of size, but it also serves as an important economic bridge between China and the rest of the world. With recent policies set in place aimed at promoting the ease of investment via the HKEX, offshore investors are in a great position to take advantage of growth opportunities in China, using Hong Kong as a regulatory buffer.
On June 30, 1997, the United Kingdom transferred sovereignty over Hong Kong to China, under which Hong Kong has existed as a semi-autonomous entity under the, “one country, two systems” constitutional principle. As such, distinct Chinese regions such as Hong Kong and Macau retain their own economic and administrative systems, while the rest of China functions simply under the People's Republic of China.
“The one country, two systems constitution is not only good for Hong Kong [economically], but also good for China,” explains Chan. However, “the rapidly changing characteristics within the region have created a dilemma in Hong Kong” to which policymakers must tread carefully so not to disparage the delicate social framework present within the state.
Chan describes how the growing prevalence of Chinese business within Hong Kong brings with it a plethora of social and political obstacles.
A notable example of this correlation comes in regards to Hong Kong’s education system. As it is in the current state, Hong Kong allows a certain number of high-performing Chinese students to study in its Universities. However, since the sample size in China is much larger (1.3 billion Chinese compared to only 7 million in Hong Kong), there is now a noticeable discrepancy between the average performance of Chinese students and Hong Kong students in Hong Kong post-secondary institutions. This has led to a highly competitive education system within the region, where local students must compete with top-tier talent from China for scholarships and opportunities.
Moreover, the problem persists even after post-secondary, where Chan notes that Chinese students are also out-competing locals for coveted jobs out of University. Since Chinese companies can reach global markets more effectively by working through Hong Kong, they are subsequently more likely to open offices there and thus, more likely to hire top-performing Chinese students due to cultural-fit, as well as their superior academic performance.
Chan asserts that one-third of Hong Kong citizens do not trust communism and are thus, reluctant to advocate for political measures that aim to further integrate the two regions. Although there have been notable measures taken to continue integration, the underlying social circumstances continue to halt any considerable progress. “Even today, a US citizen can come to Hong Kong and work for me — even without a visa. However, a Chinese citizen can only stay for two weeks, and must have a visa to come,” explains Chan. The dilemma, Chan asserts, is that Hong Kong must continue to integrate further with China in order to maintain economic stability. The Greater Bay Area project represents a promising move in the right direction, but socio-political hurdles continue to pose real challenges. “The opportunities for China-Hong Kong relations are exciting, but the political and social integration must be approached in a pragmatic way,” asserts Chan.
Indeed, Hong Kong has to figure out how to integrate with China in order to remain a key player. Much of its growth prospects are reliant on this economic alliance and without it, they may forgo substantial economic opportunities in the future.
Chan places particular emphasis on how outside investors can navigate the complexities of investing in China. Earlier this year, Beijing officially opened the doors of its multi-trillion-dollar funds management industry to overseas firms. Before this, foreign investors have been limited to owning 49% of Chinese fund-management businesses. But with a new relaxation on foreign ownership, global companies can now raise their investments straight to 51% and, over three years, to 100%.
This decision alone, however, may not be sufficient to convince foreign investors that China is truly open to global markets. When asked how foreign investors — specifically Swiss financial institutions — could take advantage of this opening up in China, Chan responds with a fairly pragmatic explanation. Chan, who owns a Hong Kong-based insurance company, says he also has to meet the same requirements as foreign companies in order to get involved with China. “Even if China opens up to investment, it is still going to be difficult because it is such a complex market.”
In order to invest in and potentially own a Chinese company, Chan says you must partner with a mainland citizen. Even for Chan, investments in mainland China are complex and slow-moving. You either invest in a State-owned Enterprise (SOE) or a private company, both of which have their benefits and drawbacks. With an SOE, you know you are getting a more bureaucratic partner; one with management who is accountable not only to themselves but also to the State. Conversely, private enterprises capitalize on more opportunities for profit-maximization, but pose the risk of precarious partnerships.
This reality only sheds light on why the HKEX continues to shatter global IPO records; since inbound FDI into China is met with heavy regulations, it is much easier for foreign investors to connect with Chinese enterprises via Hong Kong. The HKEX is a fantastic alternative since it bridges the gap between China and the rest of the world, and allows offshore investors to capitalize on a fast-growing Chinese market.
Chan places more emphasis on who you lend your trust to rather than what type of business you engage with. If one theme holds strikingly true from Chan’s discussion — and the Asia Leaders Series as a whole — it’s that one mustn’t overlook the human factor of investing in Asia. Yes, the region is experiencing rapid economic growth, but this does not mean the surrounding social environment is advancing at the same pace. “You have to be very selective” when choosing a potential partner for these types of international business ventures, says Chan. He notes that his future partnerships in China will likely be with private enterprises due to the superior flexibility, but only because he has spent over two decades building strong relationships to the point where he can enter into business with someone he knows very well.
Despite any potential sociological barriers to investment in the region, another point of emphasis is placed on Switzerland’s competitive advantages. “The quality control in China is still very weak; there is a perception that Swiss products are of superior quality to Chinese products.” An exciting opportunity exists for Swiss companies which can promote superior quality to mainland Chinese brands.
Any investor that is looking for potential opportunities in China should not overlook the social implications; they should consider the complex socio-political relation with Hong Kong, as well as what type of Chinese company to invest in, and who to invest with.
Through an annual calendar of events in Zurich, the Asia Leaders Series offers business leaders across Europe a premium platform to engage directly with high-profile figures in Asia.