Growth is the next step
Hong Kong, as well as other jurisdictions around the globe, will benefit from the burgeoning potential of, driven by foreign inflows and retail investment diversification. Further, the strong momentum in structural and regulatory reforms in Mainland China will catalyze the flow of trillions of dollars from households’ savings into financial markets.
Mainland China will continue to be Hong Kong’s most significant strategic growth opportunity. Mainland China’s capital markets are expected to grow from USD30 trillion to USD100 trillion in the next few years. There are nearly 2.62 million high net worth individuals (HNWIs) with investable assets in Mainland China, with total investable assets exceeding USD35 trillion in 2020. Cross-border business activities, closer integration with Mainland China’s economy through various market initiatives, and Hong Kong’s unique position as a vital hub for a wide range of asset classes in public and private markets are all still driving Hong Kong’s robust growth. Its capital markets aim to continuously evolve in order to capture global trends and developments. The number of Hong Kong listed companies has grown from 658 in 1997 to 2,598 as at 12 January 2023, approximately a fourfold increase in 25 years.
Source: HKEX, PWC
By focusing on the key trends shaping the future of financial services, asset and wealth managers can further leverage Hong Kong’s numerous advantages. The number of licensed banks and type 9 are over 150 and 2,000 respectively. A total of USD3.4 trillion is invested in the stock market. There are more than 900 Mainland private enterprises listed and approximately 600 fintech firms. Over 70% of the world’s RMB payments are settled in Hong Kong. More than 275,000 professionals work in the financial services sector, and financial services contribute 23.4% of GDP.
Since the advent of the Asset & Wealth Management (AWM) market in Hong Kong, both traditional and alternative asset classes have grown enormously, and the city manages a majority of alternative assets in the Asia-Pacific region, primarily from North American and European investors. It is estimated that Hong Kong attracts about 65% of its assets from other jurisdictions, with North America accounting for more than a third of them.
Hong Kong is the largest hedge fund center in Asia, with over half of all hedge funds in Asia located in Hong Kong, and the second most important private equity market in Asia. Global players have established their Asia-Pacific bases in Hong Kong, and many regional players are expanding operations due to the city’s many opportunities.
Hong Kong is the largest and most important offshore RMB hub in the world with its deep liquidity pool, robust financial infrastructure, and numerous cross-border market entry channels. Among other advantages, Hong Kong provides a wide range of RMB financial services, including clearing and settlement, trade financing, fund management, and risk management.
As a result of the combination of Hong Kong’s platform and Guangdong’s high-tech industries, the Greater Bay Area (GBA) holds immense potential for growth and prosperity. Due to its deep savings pool and the potential for mobilization of investable assets further, the GBA is an ideal testing ground for the greatest wealth management opportunity in a generation.
Asset management has been shaped and supported over time by various policymakers and regulators in the region. As recently as September 2022, the Qianhai Authority and the Financial Services and Treasury Bureau (FSTB) jointly promulgated the “18 Measures to Support the Joint Development of Shenzhen and Hong Kong Venture Capital Investments in Qianhai”.
As a global innovation and technology hub, the GBA aims to promote joint venture capital investments in Shenzhen and Hong Kong. GBA will continue to improve the investment environment and attract global capital in the Chinese venture capital industry in the future, building an international venture capital cluster in Qianhai, in order to create a large investment fund and manager center in Qianhai, facilitating cross-border investments between Hong Kong and Shenzhen, and providing an ecosystem for Shenzhen and Hong Kong’s joint development.
In the GBA, the onshore investment universe has been outstripped by soaring wealth accumulation, and domestic institutions are increasingly investing offshore through a variety of channels in order to diversify. The role of state capital gatekeepers has prompted many investors to have long-term investment horizons, and they are increasingly searching outside their home markets without being restricted by geographical, sectoral, or asset class limitations. Since they are gatekeepers of state capital, they are investing for the benefit of the region’s economy. In doing so, investment activities are guided by a long-term view of structural and secular trends encompassing a wide range of themes, including the disruption of technology, health care innovation, urbanization and consumer upgrading, climate change and sustainability, and the emergence of e-commerce.
Bringing sustainable finance into the mainstream of capital markets ecosystem, ESG and sustainability have become key agenda items. Among Asian-Pacific cities, Hong Kong has begun to position itself as a green finance destination. Asset owners and asset managers seeking a regional hub for sustainable and green finance activities will continue to be attracted to Hong Kong’s strengths in capital raising, risk management, and asset management.
Over 120 funds that are ESG-approved. In 2021, the Government issued green bonds worth close to USD6.5 billion in multiple currencies. A cumulative green debt offering of USD20 billion by Hong Kong aligns with the Green Bond Database (GBDB). Since Core Climate’s launch, 400,000 tons of carbon credits have been traded. Listing of the first green bond ETF in Q3 2022, while STAGE now features more than 100 sustainable products.
Changing global financial landscapes are being caused by the rapid rise of virtual assets, which creates risks and opportunities for both new and established players. Particularly in the past three years, virtual currency has risen and fallen significantly. Several high-profile corporate failures in the industry have been highlighted recently. Regulators are actively exploring how to leverage this new technology in the broader capital markets while maintaining sound regulations.
Embracing virtual assets, Hong Kong adults with discretion over their household finances are almost universally aware of crypto, with 91% (94% globally) knowing about it. The survey found that one-third of Hong Kong respondents were either investing in or exchanging crypto in some way.
Hong Kong’s financial services industry benefits from the growth and adoption of virtual assets by investors. Virtual assets have the potential to bring about financial innovations, efficiency, and capital formation, even though they are regarded as an emerging asset class. In this regard, a close eye has been paid to the rapid development of this field in Hong Kong. A prudent approach has always been taken by Hong Kong to virtual assets, restricting market access to only Professional Investors (PI).
The Security and Future Commission (SFC) plans to conduct a consultation on how to provide retail investors with appropriate access to virtual assets after Hong Kong proposed new regulations which allow retail investors to trade in certain virtual assets.
Given Hong Kong’s significant interest in virtual assets, the renewed focus is noteworthy. Hong Kong’s policy changes offer an opportunity to strengthen its leadership position in both virtual asset capital formation and exchange-traded product trading, as they present a powerful avenue for revolutionizing the financial services industry and creating a more open and connected global financial system.
The growing Hong Kong virtual asset ecosystem would potentially enable new use cases, including trade of digital art and non-fungible tokens (NFTs), tokenization of real-world assets, and tokenization of equity and debt securities.
Hong Kong’s capital markets infrastructure must continue to be improved in order to embrace such a new age of opportunities. As the leading international financial center in Asia-Pacific, Hong Kong is well positioned to leverage its unique strengths and capitalize on the chances presented by key financial services trends.
In addition to serving as a crucial bridge between Mainland China and international markets, Hong Kong also facilitates innovation and entrepreneurship. A variety of secular flows are presenting Hong Kong with a number of chances, including asset managers becoming new financiers of infrastructure, sustainable finance becoming mainstream, and virtual assets becoming more prevalent.
Taking advantage of opportunities and facing the challenges ahead, as well as considering current environment and longer-term development scenarios, can help to meet the needs and create wealth for business, individuals and community at large, and at the same time to allocate resources accordingly in 2023/24 Budget, leading to a better and brighter future for Hong Kong.