The rise and rise of Hong Kong as a financial centre and stock market of global significance has confounded critics who declared the city would be finished as an independent globally important centre when Hong Kong’s sovereignty reverted to China.
But in the week that Hong Kong’s first yuan-denominated IPO is set to make its stock market debut and giant commodities trader Glencore may announce details of a US$60 billion dual London-Hong Kong flotation, perhaps it is a good time to consider the heresy that Hong Kong is getting too close and cosy with the mainland for its own good.
“You feel that Hong Kong is continually looking over its shoulder asking what Beijing wants us to do, rather than looking at what it should do for its own economy,” said Fraser Howie, an investment banker who has written a best-selling book about China’s fragile financial system.
He said the Hong Kong share market is playing a potentially dangerous game in the way it is integrating with the mainland and accepting laxer mainland standards.
Not everyone agrees. Former investment banker and now Harvard University academic William Overholt is among the bullish supporters of Hong Kong. He noted in a paper published this month that Time magazine in 2008 had coined the expression NyLonKong - meaning New York, London, Hong Kong - to describe the new global financial system, which seemed inconceivable in 1996, on the eve of the handover.
Overholt recalls that in 1996 he testified before the banking committee of the US House of Representatives about “the risk that Hong Kong’s banking system would collapse, perhaps even causing severe damage to the US financial system”.
Ten years after the handover he said: “In the global financial crisis of 2008-09 the realities became clear: Hong Kong’s banks were less risky than New York’s (as I had testified in 1996), its financially important institutions, such as property companies, were far more resilient, and its financial regulation was sounder.”
He uses the Global Financial Centres Index 2010 to illustrate how Hong Kong has become one of the big financial powers. Its ranking give London pride of place with a score of 772, followed closely by New York on 770 and Hong Kong on 760, “with scores that are barely distinguishable”, said Overholt.
As Overholt notes, a major financial centre has multiple markets, including banking, equities, currencies, bonds, commodities and derivatives, and Hong Kong’s stature varies among the different products.
In terms of equities, Hong Kong’s capitalisation is smaller than Tokyo’s and similar to Shanghai’s, but Overholt nevertheless asserts that Hong Kong is “far more important globally because it is, alongside London and New York, the Asian arm of the globalised market”. Tokyo and Osaka, he says, are the capitals of Japan’s market and Shanghai is the capital of the mainland market.
Daily trading in Hong Kong last year was US$8.8 billion, higher than London’s US$7.6 billion.
In terms of important economic function of a stock exchange, raising capital, Hong Kong comes into its own, thanks to the mainland’s economic miracle and the large numbers of its companies making their stock market entrance. By 2010, each of the Chinese exchanges - Hong Kong, Shanghai and Shenzhen - was raising substantially more capital than the New York Stock Exchange, though they each lagged Nasdaq. Last year Hong Kong IPOs raised US$52 billion, more than the US$35 billion raised in New York.
Hong Kong does not play a large role in bond markets, as the government does not have a lot of debt. In derivatives, Hong Kong has a dominant role in exchange-traded fund options and is a player in stock options and stock index futures, but it is not a significant player in other major derivatives markets, such as stock index options, interest rate futures, currency futures or commodity futures.
Overholt believes that Hong Kong’s biggest asset is “its deserved reputation for integrity”. He notes that the Asian Corporate Governance Institute recently criticised Hong Kong for some declines in standards, but still placed Singapore and Hong Kong at the top of its 2010 rankings. The CFA Institute rates Hong Kong’s integrity as high and rising, he said.
He waxes eloquent about myriad Hong Kong advantages, the integrity of its English common law system, the high standard of judicial appointments, its cosmopolitan society and economy, freely convertible currency, open but well-regulated banking system, and the benefit of proximity to the dynamic mainland economy. Many mainland companies, he says, “prefer to operate under Hong Kong law rather than mainland law and thereby escape some of the political pressures and legal uncertainties that accompany a mainland domicile”.
Fraser Howie starts from a different, and clearly sceptical, perspective. He has lived and worked on the mainland, and in Hong Kong, speaks Putonghua, and was recently co-author with another banker, Carl Walter, of Red Capitalism, a book that raised questions about the stability of the mainland financial system.
On stock markets, he praises the mainland for “developing an infrastructure that works very well”, but he questions whether the mainland has yet developed the same quality of governance that allows proper valuations of companies. “Ultimately, underpinning a stock market is the valuation of companies, and that’s still missing in the Chinese market.”
As far as Hong Kong is concerned, he notes a big difference between Hong Kong immediately after “Black Monday” of 1987, when Wall Street crashed and Hong Kong shut up shop for six days, and today “when almost any global company would look at Hong Kong now as a potential global listing place”.
Indeed, the decisions of luxury goods maker Prada, Coach and Samsonite, to follow L’Occitane in seeking Hong Kong listings are testament to Hong Kong’s global reputation. Swiss-based Glencore may announce details of a London-Hong Kong dual listing later this week.
Such international trophy listings do not amount to much unless there is active trading. Tokyo heralded listings by a large number of international companies in the 1980s as proof that it was an important market; but most of the internationals later slunk away complaining of limited benefits of a Tokyo listing.
Howie fears that Hong Kong is in danger of sacrificing too much and getting too cosy with the mainland: “Hong Kong has to be careful not to sacrifice its investing standards. David Webb is the champion of this in compiling materials. There was the case of I think it was ICBC, where one of the executives of the Hong Kong exchange said, ‘We welcome their listing in Hong Kong’. And this was before they had even filed an application. If nothing else, just be more sensible in what you are doing.”
He questions Hong Kong’s confidence that it will change the mainland’s standards rather than the other way round. “The Hong Kong authorities themselves, the SFC and the exchange, willingly admit that they are powerless to do any real enforcement on companies outside of Hong Kong in terms of business operations or domicile.”
The recent decision that Hong Kong will accept mainland accounting standards and auditors has Howie almost spluttering into his coffee.
“That’s incredible, incredible. It completely undermines Hong Kong as setting the international standards for Chinese companies. The more Hong Kong panders to China, the worse it will be.”
2 comments:
Hong Kong’s dangerous mainland liaisons
Increasing integration with Beijing carries risks
Kevin Rafferty
26 April 2011
The rise and rise of Hong Kong as a financial centre and stock market of global significance has confounded critics who declared the city would be finished as an independent globally important centre when Hong Kong’s sovereignty reverted to China.
But in the week that Hong Kong’s first yuan-denominated IPO is set to make its stock market debut and giant commodities trader Glencore may announce details of a US$60 billion dual London-Hong Kong flotation, perhaps it is a good time to consider the heresy that Hong Kong is getting too close and cosy with the mainland for its own good.
“You feel that Hong Kong is continually looking over its shoulder asking what Beijing wants us to do, rather than looking at what it should do for its own economy,” said Fraser Howie, an investment banker who has written a best-selling book about China’s fragile financial system.
He said the Hong Kong share market is playing a potentially dangerous game in the way it is integrating with the mainland and accepting laxer mainland standards.
Not everyone agrees. Former investment banker and now Harvard University academic William Overholt is among the bullish supporters of Hong Kong. He noted in a paper published this month that Time magazine in 2008 had coined the expression NyLonKong - meaning New York, London, Hong Kong - to describe the new global financial system, which seemed inconceivable in 1996, on the eve of the handover.
Overholt recalls that in 1996 he testified before the banking committee of the US House of Representatives about “the risk that Hong Kong’s banking system would collapse, perhaps even causing severe damage to the US financial system”.
Ten years after the handover he said: “In the global financial crisis of 2008-09 the realities became clear: Hong Kong’s banks were less risky than New York’s (as I had testified in 1996), its financially important institutions, such as property companies, were far more resilient, and its financial regulation was sounder.”
He uses the Global Financial Centres Index 2010 to illustrate how Hong Kong has become one of the big financial powers. Its ranking give London pride of place with a score of 772, followed closely by New York on 770 and Hong Kong on 760, “with scores that are barely distinguishable”, said Overholt.
As Overholt notes, a major financial centre has multiple markets, including banking, equities, currencies, bonds, commodities and derivatives, and Hong Kong’s stature varies among the different products.
In terms of equities, Hong Kong’s capitalisation is smaller than Tokyo’s and similar to Shanghai’s, but Overholt nevertheless asserts that Hong Kong is “far more important globally because it is, alongside London and New York, the Asian arm of the globalised market”. Tokyo and Osaka, he says, are the capitals of Japan’s market and Shanghai is the capital of the mainland market.
Daily trading in Hong Kong last year was US$8.8 billion, higher than London’s US$7.6 billion.
In terms of important economic function of a stock exchange, raising capital, Hong Kong comes into its own, thanks to the mainland’s economic miracle and the large numbers of its companies making their stock market entrance. By 2010, each of the Chinese exchanges - Hong Kong, Shanghai and Shenzhen - was raising substantially more capital than the New York Stock Exchange, though they each lagged Nasdaq. Last year Hong Kong IPOs raised US$52 billion, more than the US$35 billion raised in New York.
Hong Kong does not play a large role in bond markets, as the government does not have a lot of debt. In derivatives, Hong Kong has a dominant role in exchange-traded fund options and is a player in stock options and stock index futures, but it is not a significant player in other major derivatives markets, such as stock index options, interest rate futures, currency futures or commodity futures.
Overholt believes that Hong Kong’s biggest asset is “its deserved reputation for integrity”. He notes that the Asian Corporate Governance Institute recently criticised Hong Kong for some declines in standards, but still placed Singapore and Hong Kong at the top of its 2010 rankings. The CFA Institute rates Hong Kong’s integrity as high and rising, he said.
He waxes eloquent about myriad Hong Kong advantages, the integrity of its English common law system, the high standard of judicial appointments, its cosmopolitan society and economy, freely convertible currency, open but well-regulated banking system, and the benefit of proximity to the dynamic mainland economy. Many mainland companies, he says, “prefer to operate under Hong Kong law rather than mainland law and thereby escape some of the political pressures and legal uncertainties that accompany a mainland domicile”.
Fraser Howie starts from a different, and clearly sceptical, perspective. He has lived and worked on the mainland, and in Hong Kong, speaks Putonghua, and was recently co-author with another banker, Carl Walter, of Red Capitalism, a book that raised questions about the stability of the mainland financial system.
On stock markets, he praises the mainland for “developing an infrastructure that works very well”, but he questions whether the mainland has yet developed the same quality of governance that allows proper valuations of companies. “Ultimately, underpinning a stock market is the valuation of companies, and that’s still missing in the Chinese market.”
As far as Hong Kong is concerned, he notes a big difference between Hong Kong immediately after “Black Monday” of 1987, when Wall Street crashed and Hong Kong shut up shop for six days, and today “when almost any global company would look at Hong Kong now as a potential global listing place”.
Indeed, the decisions of luxury goods maker Prada, Coach and Samsonite, to follow L’Occitane in seeking Hong Kong listings are testament to Hong Kong’s global reputation. Swiss-based Glencore may announce details of a London-Hong Kong dual listing later this week.
Such international trophy listings do not amount to much unless there is active trading. Tokyo heralded listings by a large number of international companies in the 1980s as proof that it was an important market; but most of the internationals later slunk away complaining of limited benefits of a Tokyo listing.
Howie fears that Hong Kong is in danger of sacrificing too much and getting too cosy with the mainland: “Hong Kong has to be careful not to sacrifice its investing standards. David Webb is the champion of this in compiling materials. There was the case of I think it was ICBC, where one of the executives of the Hong Kong exchange said, ‘We welcome their listing in Hong Kong’. And this was before they had even filed an application. If nothing else, just be more sensible in what you are doing.”
He questions Hong Kong’s confidence that it will change the mainland’s standards rather than the other way round. “The Hong Kong authorities themselves, the SFC and the exchange, willingly admit that they are powerless to do any real enforcement on companies outside of Hong Kong in terms of business operations or domicile.”
The recent decision that Hong Kong will accept mainland accounting standards and auditors has Howie almost spluttering into his coffee.
“That’s incredible, incredible. It completely undermines Hong Kong as setting the international standards for Chinese companies. The more Hong Kong panders to China, the worse it will be.”
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