China Passes Hong Kong National Security Law, But Creates More Entries

China is paving the way for more money to flow to Hong Kong and is strengthening its status as a financial center.

Foreign investors and companies have been cautious that Hong Kong’s status as a financial center could be eroded, as China last week pushed ahead to implement a controversial national security law in the city despite criticism. That has caused friction with Washington, which has said it will revoke Hong Kong’s special trade status with the United States.

In that context, China’s central bank last week launched an initiative, Wealth Management Connect, which analysts say will bring more entries to Hong Kong and attract foreign financial institutions to expand their business in the city.

Hong Kong saw strong entries last month, when two U.S.-listed tech giants, Netease and JD.com, launched secondary mega listings in the city.

Last week, the People’s Bank of China announced an initiative: Wealth Management Connect, which will allow continental investors in the Bay Area of ​​Great Britain to buy financial products in Hong Kong and Macao, and vice versa.

The Greater China Bay Area is a region comprising nine Chinese cities in Guangdong province and two special administrative territories: Hong Kong and Macao. That region represents 12% of China’s gross domestic product.

Lam said he reflected “strong support” from Beijing and that “Hong Kong continues to play a leading role in the country’s economic development and opening of financial markets,” according to Reuters.

Analysts said the move will likely bring many capital flows to the Asian financial center.

“If you thought Hong Kong’s status as a financial center was going to disappear, think again. Are foreign companies going to withdraw before the wave of money hits Hong Kong? I don’t think so,” said Brendan Ahern, director of investments. from investment firm KraneShares, told CNBC in an email.

He said the news reaffirms that the state of Hong Kong’s financial center “is not in jeopardy”, while “providing a strong reason for financial firms to remain entrenched” in Hong Kong.

Tommy Wu, chief economist at Oxford Economics, said: “This initiative should attract foreign financial institutions to expand their wealth management business in Hong Kong, especially since the Greater Bay Area is one of the richest regions in China”.

Wealth Management Connect will not only serve mainland residents who have a “genuine need” to expand their investments, Wu said, but will also reach out to foreign investors, who can buy wealth products sold in the Greater Bay Area.

In comments early last month, Hong Kong Chief Executive Officer Carrie Lam spoke of proposals she made to the Chinese central government to deepen Hong Kong’s role as a gateway to China.

“These proposals will revolve around this plan to make Hong Kong more international, to make Hong Kong a more prominent offshore renminbi hub, to truly transform Hong Kong into the center for private wealth management “he said, according to a transcript of his comments.

“In doing so, we should also promote greater connectivity between Hong Kong’s financial markets and the mainland financial markets,” added Lam.

China’s decision to pass the national security law in Hong Kong has increased tensions with the United States, which has a special business relationship with the Asian city.

Last week, Washington began taking additional measures, such as stopping defense exports to Hong Kong and restricting its access to high-tech products.

“Despite strong US rhetoric against the national security law, the American measures taken so far have been quite modest,” Wu of Oxford Economics wrote in a report last week.

Furthermore, China “has an incentive” to ensure that the “one country two systems” deal survives, and to persuade the world that the system is still in place, he wrote.

Under this framework, Hong Kong, a former British colony that returned to Chinese rule in 1997, receives some freedoms that the citizens of the continent do not have. That includes self-governing power, limited electoral rights, and a largely separate legal and economic framework from mainland China.

“In the short term, the negative impact will probably not be visible. Entries to Hong Kong have been very strong in recent months and will likely continue in the short term, given the wave of IPO from Chinese companies in Hong Kong so far, and for the rest of the year, “Wu wrote.

Listings in Greater China increased in the first half of this year, despite declining globally due to the impact of the coronavirus. According to EY data, the Hong Kong and Shanghai markets increased the number of deals and the total amount raised.

In the medium term, Hong Kong will be able to take advantage of its role as a key gateway into and out of China, Wu wrote. Beijing is likely to continue implementing new programs where Hong Kong will continue to play that key role, he said, with one example being Wealth Management Connect.

Still, he warned that tensions between the United States and China will remain a key risk for Hong Kong, and that foreign investment in the city will likely be “affected to some extent by these current uncertainties.”