Debate swirls over HK capital flight risk

Washington's withdrawal of HK's special trade status would backfire on over 1,000 US companies in the city

by Jeff Pao
Debate swirls over HK capital flight risk
Customers wait to use an ATM at a bank in Kwun Tong, Kowloon, on May 28, 2020. Photo: Asia Times

Economists and market analysts are split on whether capital will flee Hong Kong if the United States formally ends the Asian financial hub’s special trade status. 

Speculation of a possible run for the exits have been driven by US Secretary of State Mike Pompeo’s comments on Wednesday that Hong Kong no longer has “a high degree of autonomy from China” and thus “does not continue to warrant” special status. 

Andy Kwan Cheuk-chiu, an economist and the director of the privately-run ACE Centre for Business and Economic Research, said Hong Kong’s role as an import-export center will be eroded if the city is no longer a separate customs territory from China. 

Kwan said a large-scale capital outflow and brain drain from Hong Kong is possible, which he suggests would shock the Hong Kong dollar. In the worst case scenario, Hong Kong’s economic growth will be hurt as the city loses its status as an international financial city.

Since 1983, Hong Kong has pegged its currency to the US dollar with an exchange rate of between 7.75 and 7.85 to one US dollar. The peg was aimed at helping Hong Kong attract foreign capital.

Separate customs territory

Terence Chong Tai-Leung, an associate professor of economics at the Chinese University of Hong Kong, said the US is likely to consider its own economic costs before it imposes any sanction on Hong Kong and China.

If the US stops recognizing Hong Kong as a separate customs territory from China, it will hurt itself because it has more than a thousand companies in the territory, Chong said.

Ryan Lam Chun-wang, head of research at Shanghai Commercial Bank, said if the US ends its special trade treatment of Hong Kong, the negative impact on the city’s economy may not be great because Hong Kong’s direct exports to the US are worth only about HK$1 billion (US$129 million) a year. 

Lam said, however, that US sanctions may hurt companies’ confidence in investing in Hong Kong. He said it is hard to predict whether big capital outflows would occur in the scenario.

Felix Chung Kwok-pan, leader of the pro-business Liberal Party, said Pompeo’s latest statement would affect the confidence of the business sector in Hong Kong and negatively influence future investment. “Everything will be on hold,” he said.

Hong Kong’s business sector is concerned that the US may strip the city of its special status as Beijing imposes a new security law for the city, said Chung, adding that Hong Kong seems to have become a victim caught in the middle of the rising conflict between China and the US.

Political tensions have increased over the past week as Beijing proposed to impose a new national security law for Hong Kong by adding the clauses directly into the Annex III of the Basic Law and bypassing the city’s Legislative Council.

‘Behaviour and activities'

On Thursday, China’s National People’s Congress passed a motion to grant its standing committee the power to discuss and approve the proposed national security law. The resolution was submitted before the NPC on Thursday afternoon and approved by 2,878 votes to one with six abstentions.

The NPC’s Standing Committee chairman, Li Zhanshu, said the decision was in line with the “one country, two systems” principle, as well as the “fundamental interests of the people in the mainland and the Hong Kong residents.”

According to media reports, the law will ban both “behaviour and activities” that endanger national security.

In Hong Kong, more than 360 people were arrested on Wednesday while lawmakers were debating a controversial national anthem bill. On Thursday, the Legco passed the bill after several pro-democracy lawmakers were taken away from the chamber by security guards.

American Chinese entrepreneur Yuan Gongyi said on his newly established YouTube channel that Hong Kong people should sell their H-shares and change their savings into US dollars due to the uncertain political and market situations. 

H-shares are shares of Chinese mainland companies that are listed on the Hong Kong Stock Exchange or other foreign exchanges. He said coming US sanctions will be a strong hit to China, which is suffering from an economic slowdown and a lack of foreign exchange.

Arthur Yuen, deputy chief executive of the Hong Kong Monetary Authority said after talking to bankers that there is no sign of capital outflows from Hong Kong, yet. He said also that there has been no noted increase in the number of people who seek to open overseas bank accounts.

Yuen said there was still plenty of liquidity in Hong Kong’s banking sector.

As of Thursday, there was no sign of panicking customers trying to withdraw all of their savings from commercial banks, though one person said on social media he had tested withdrawing US dollars from Hong Kong’s ATMs in case of an emergency.

This story appeared first on Asia Times