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Betting on Hong Kong remaining a key financial centre

Ben Paul
Ben Paul • 7 min read
Betting on Hong Kong remaining a key financial centre
SINGAPORE (Sept 16): On Sept 4, as I watched my shares in Hongkong Land Holdings bounce strongly, it occurred to me that I could be accused of being invested in the people of the former British colony not getting their way. The talk in the market that day
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SINGAPORE (Sept 16): On Sept 4, as I watched my shares in Hongkong Land Holdings bounce strongly, it occurred to me that I could be accused of being invested in the people of the former British colony not getting their way. The talk in the market that day was that Beijing would strategically allow Hong Kong Chief Executive Carrie Lam to formally withdraw the controversial extradition bill that had sparked several weeks of sometimes violent protests, but at the same time push for tougher action to restore law and order on the streets. This perceived political gamesmanship, some market watchers hoped, would quell the calls for wider democratic freedom and enable the city to get back to business as usual.

With the value of my shares in Hongkong Land at stake, I have to confess that a part of me was hoping that the good people of Hong Kong would abandon their struggle. Hongkong Land was among a number of stocks I bought late last year as markets everywhere dipped. Controlled by the Jardine Matheson group, the company has a formidable portfolio of prime commercial property in Asia, more than half of which is in Hong Kong. Its shares were trading at a steep discount to its net asset value, and offered a decent dividend yield. (The company had an NAV of US$16.50 a share as at June 30 and paid a full-year 2018 dividend of 22 US cents a share.)

The stock climbed to more than US$7.50 in March before it began sliding. In July, as the protests in Hong Kong looked likely to become protracted, the stock went into a steep dive. It hit a low of US$5.40 last month. Given the attractive valuations at which the stock was trading, I was not unnerved by the volatility or inclined to sell. Instead, I was just hoping that the protests would quickly blow over.

Unfortunately, this has not happened. Even after the formal withdrawal of the extradition bill was announced on Sept 4, protesters dressed in black have continued making their presence felt despite the efforts of the police. Now, the disruption and uncertainty this has caused is said to have sparked capital flight as well as a slump in visitor arrivals, which can’t be good for Hong Kong’s commercial property sector.

Worse, the tension has led to businesses in Hong Kong and their employees turning on each other. In particular, employees of Cathay Pacific Airways found to have participated in the protests are reportedly being fired. This comes after the authorities in China said such airline employees should not be involved in flights to the mainland. Separately, the Big Four accounting firms — Deloitte, EY, KPMG and PwC — have distanced themselves from an advertisement supporting the protests that appeared in Hong Kong’s Apple Daily, apparently placed by an anonymous group of the firms’ employees.

Beliefs, values and economics

Several people familiar with Hong Kong tell me that the protesters, who come from all walks of life, have legitimate grievances, not least among them the sky-high cost of housing. The extradition bill, which would have allowed the authorities to detain and extradite people wanted in territories that Hong Kong does not have extradition agreements with, including Taiwan and mainland China, became a flashpoint for the discontent.

Since then, the protesters’ list of demands has expanded. Besides withdrawing the extradition bill, they want the chief executive to resign, the government to stop characterising the clashes on the streets as riots, an independent inquiry into the actions of the police, everyone arrested so far to be freed and fully democratic elections.

Curiously, many of the same people who sympathise with Hong Kongers also criticise them for protesting in the streets and making demands to which China is unlikely to accede. The fact that the extradition bill has indeed been withdrawn has not changed their minds. Democratic elections, in particular, will never happen, they tell me. So, stirring up trouble in the streets is futile. In the end, the turmoil will just make Hong Kong less useful to China, and further reduce the likelihood of China ever acceding to the demands of the protesters. And, anyway, Hong Kongers did not have democracy under the British, so why are they complaining about not having it now?

Of course, many people expressing this view are invested, one way or another, in the continued rise of China and the idea that the world must adapt to it. Being invested in something makes it hard to see alternative viewpoints — for instance, that the people of Hong Kong simply do not have the same beliefs and values as the mainlanders, and that they are prepared to act on those beliefs and values even when it isn’t obviously in their economic interest.

We have seen deep divisions within other nations spur similarly surprising behaviour — such as the Americans voting for Donald Trump and the British voting to leave the European Union. The resulting geopolitical and financial market turmoil these events caused over the past few years had many investors, myself included, wondering when everyone in the US and Britain would come to their senses. Yet, as with bringing the protests in Hong Kong to an end, addressing divisions in the US and Britain is likely to be a long and messy process, and require unconventional political manoeuvring.

Useful to China

So, what should investors do amid all the uncertainty? Besides looking for value within asset classes, it is important to be widely diversified. And, don’t assume that no good will come from political turmoil, whether in the US, Britain or Hong Kong. Human beings are hardwired to survive, and good companies quickly adapt when the ground shifts.

On Sept 11, amid all the political turmoil in Hong Kong as well as Britain, Hong Kong Exchanges and Clearing (HKEX) unveiled a US$37 billion ($51 billion) bid for the London Stock Exchange Group (LSEG). While many market watches are expecting the deal to run into obstacles, it was still an audacious move that underscores the continued relevance of Hong Kong and London as international financial centres despite the uncertainties they currently face.

“A combination of two markets of this size and significance has never been done before and would create a globally connected exchange group that serves as the leading international platform for financial assets denominated in US dollars, euro and renminbi,” says Charles Li, CEO of HKEX, in a blog about the proposed deal. “LSEG is the world leader in the clearing of fixed income and currency products, while HKEX operates world-leading equity, derivatives and IPO markets. Together, the combined entity would represent a fully vertically and horizontally integrated platform for all asset classes, serving global investors and international companies across time zones and continents,” he adds.

Li goes on to note how the deal would help Hong Kong continue to support China as it opens its capital account and internationalises its currency. “This transaction could help provide new interconnections for stocks, bonds, indices and other financial products, which could be important channels that support China’s full use of the global financial infrastructure,” Li says.

So, perhaps it is too soon to write off Hong Kong’s future prospects. As for my shares in Hongkong Land, which are now about 5% underwater, I prefer to not think of them as an investment in the people of Hong Kong not getting their way. Instead, I see it as a bet that Hong Kong will remain a major international financial centre even as its people press for a greater say in how the city is run.

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