Unlike the long-established financial hubs of New York and
London, Hong Kong has experienced a meteoric rise that has
resulted in its position as Asia's financial centre.
Admittedly, its proximity to China has contributed to its
success. But many laud the ease of doing business, its
commitment to free markets and its networking potential as
reasons for continued growth.
Although Hong Kong's close relationship with China is key to
its global prominence, businesses and citizens alike are wary
of the mainland's intentions for the city-state. Questions
about the one country, two systems policy arise not only in
political circles, but also in regulatory developments.
Hong Kong faces competition closer to home, as well. Sources
say that Singapore is a challenger due to Indonesia's growth
and frontier markets such as Cambodia, Vietnam and Myanmar.
Looking further into the future, Shanghai may challenge Hong
Kong as a renminbi (RMB) hub.
CNMC: On June 29, China Nonferrous
Mining Corporation became the first Africa-based
company to list on the HKEx. Impressively, HKEx did not
require a waiver for the Zambian copper company's
listing. The HK$2.44 billion IPO shows that African
operations may be able to satisfy HKEx's listing
requirements, and lawyers expect it to spark a wave of
securities: January 1 to August 31 2012
Red chips and H-shares
According to many, a key difference between Hong Kong,
London and New York is that Asia is where the money is. Davis
Polk & Wardwell partner Antony Dapiran says sentiment isn't
as good in the US and Europe, which are the markets
traditionally serviced by New York and London. "In Asia,
investors are looking to invest and companies are growing and
raising capital," he says.
Although high-profile IPOs of international corporates such
as United Co Rusal and Prada attract media attention, they are
not the norm. Instead sources agree that the Hong Kong stock
exchange (HKEx) is the ideal listing venue for Chinese
companies. Those listed in New York suffered low valuations
following accounting scandals at Sino-Forest Corporation and
Longtop Financial Technologies. Closer to home, they receive
more reflective valuations. In a report published by the HKEx
on August 31, H-shares (Hong Kong-listed companies incorporated
in China) and red chips (China-based companies incorporated
internationally) account for 45.8% of market
But sources believe the HKEx's listing requirements are
particularly prescriptive. A financial services firm says the
rules are perceived as relatively process-heavy in balancing
investor protection with efficiency.
IPO volume has slowed due to the China's economic slowdown;
also because most Chinese state-owned enterprises are already
listed. As of September, the HKEx's largest IPO of 2012 was
that of Inner Mongolia Yitai Coal, which raised $903 million.
The Wall Street Journal cited a report by Haitong
Securities stating that funds raised from Hong Kong IPOs fell
77% year-to-date from HK$190.4 billion in 2011 to HK$43 billion
in 2012. There is hope that IPOs will return in Q3. At the time
of press, Zhengzhou Coal Mining Machinery Group was preparing
for a listing tipped to raise up to $500 million.
One country, two systems
Hong Kong's market regulator, the Securities & Futures
Commission (SFC), has been active in implementing and
investigating issues related to transparency and corporate
governance. This year it introduced a positive obligation on
the officers of listed companies to make disclosure of
price-sensitive information as soon as reasonably practicable.
A Hong Kong-based regulatory partner believes this is a major
step forward, especially since standards and timeliness of
disclosure have been poor in Hong Kong in the past. "I would
like to see criminal penalties for non-disclosure in especially
bad cases," the partner adds.
Following a spate of accounting scandals from US-listed
Chinese companies, the SFC has also been active in
investigating companies for alleged fraudulent activity. But
the People's Republic of China's (PRC's) state secrecy laws
make it a criminal offence to disclose corporate records and
require work drafts compiled within China by securities firms
and other agencies must remain within the country. This is
A seminal case in this regard is the SFC's legal action
against Ernst & Young, which commenced this August. This
will determine whether the regulator's demands under Hong Kong
law outweigh China's secrecy laws. Ernst & Young, as
auditor, refused to disclose the work papers of Chinese company
Standard Water, which had applied to list in 2009. After the
advisory firm abruptly resigned in 2010, Standard Water pulled
its listing. But Ernst & Young's mainland joint venture
partner refused to comply with the SFC's demands for the work
papers, citing PRC law.
One regulatory lawyer says that this is a dormant issue, and
that only now 15 years since the city-state's handover
that these practical issues are being addressed. "There
is a huge gulf between mainland and Hong Kong law, and there
are practical implications for 'one country, two systems'
arising from this case," he says.
Alleged accounting scandals may damage investor confidence
in H-shares and red chips, lowering valuations of listed
Chinese companies. But corporate governance activist David Webb
says that they should not receive special treatment. He
comments: "If China isn't going to play ball, it will raise
issues about having it both ways: while Chinese companies can
raise capital in international markets, they can't be subject
Given its proximity and relationship with China, it is no
surprise that Hong Kong is the world's RMB clearinghouse.
Although Hong Kong, London and Singapore are vying to become
offshore RMB trade centres, counsel say Hong Kong benefits from
Clifford Chance partner Francis Edwards emphasises that RMB
liquidity in other jurisdictions support Hong Kong. For
example, to clear RMB funds in London, transfers must be made
through Hong Kong's settlement systems because the
infrastructure required for the currency's clearing is based in
Taipei may offer further competition, after Taiwan signed a
memorandum of understanding on currency clearing with China on
August 31. When it takes effect at the end of October, Taipei
will become only the second centre where Chinese currency will
be deliverable, beating Singapore and London which were also
vying for offshore RMB clearing.
However, the agreement seems largely symbolic, and designed
to ease cross-strait relations rather than support material
change in the international use of the RMB. Most believe that
its impact will be limited, as it will not reach new RMB
investors in Europe or Southeast Asia.
Hong Kong's appeal, however, lies in its innovative
RMB-denominated instruments. On September 17, the HKEx
introduced RMB currency futures, which had been eagerly
anticipated by the market. It is also looking to develop RMB
markets in fixed income, currencies and commodities.
Sources unanimously agree that Hong Kong boasts the best
networking opportunities in Asia. Jason Sambanju, co-head of
Paul Capital's Asian operations, says: "Hong Kong feels like an
information hub. Exchange of information happens quickly via
formal or informal networks informal networking is
especially important because this is such a densely
Most of Hong Kong's office buildings and expatriate
residences are located in the 12.5 square kilometer Central and
Western district, which comprises the central business district
and the Mid-Levels residential area. Nearly all sources note
that chance meetings with acquaintances occur frequently due to
the area's density, and that those impromptu connections often
lead to deals.
Moreover, the centre has strong inter-Asia connections. A
multinational financial services firm says that one of Hong
Kong's advantages is that it is a two-hour flight to most major
Chinese cities and only six hours from half the world's
population. A lawyer in the private equity industry agrees:
"Hong Kong is the hub of emerging Asia, and is where you can
plug into any network you want."
Because of the concentration of people with similar
interests, sources frequently compare Hong Kong's influence on
Asia's financial sector to that of Silicon Valley's on the
technology sector. Most sources agree that camaraderie flows
out of Hong Kong's light regulatory touch, and that the free
flow of information and transparency draw a stark contrast to
other Asian countries.
China's double-edged sword
While counsel concur that Hong Kong's proximity to China is
helpful, they agree that there are some drawbacks; most
notably, its reliance on China's economic growth.
Akiko Mikumo, managing partner of Weil Gotshal & Manges
Hong Kong says the China risk is Hong Kong's biggest. "It's not
a negative, because China has a developing legal system and a
developing economy that shows how much it has been able to
achieve in the last 40 years," she says.
But China's ascendance may ultimately challenge Hong Kong as
a financial centre. In March 2009, China's State Council
announced an initiative promoting Shanghai's evolution into a
fully-fledged international financial centre by 2020 following
capital markets development and possibly the full
convertibility of the RMB.
Hong Kong's rule of law, however, may prove its most
important asset. Sources believe that Shanghai will be a
domestic financial hub, but will be unable to reach the same
heights unless it is able to meet the same level of
predictability and reliability.
Financial hub of tomorrow, not today
Ultimately Hong Kong's advantage over both its regional and
international rivals is a lenient regulatory environment.
Dapiran says Hong Kong hasn't adopted the
batten-down-the-hatches mentality that the US and Europe seem
to have in the last few years, which is why it's remained so
The regulatory partner agrees, adding that it's quite
refreshing for people to come here compared to the mound of
regulations coming out under Dodd-Frank. However the counsel
warns that the impact of US legislation on Asia remains a
Most sources admit that Hong Kong is not yet an
international financial centre at the level of London and New
York, although its regional role means it is poised for future
growth. Mikumo says Hong Kong is a more regional financial
centre than New York and London. "As Asia becomes a global
financial power, Hong Kong will be a beneficiary," she says.
"However, all good businesses, including investment houses and
law firms, need to be in three places at a minimum: London,
Hong Kong and New York."
For the rest of IFLR's October
cover story, see:
Which city is the financial hub of the future?
London: centre of the
New York: the
Best of the rest