Mainland hinterland afford SAR room for further development

Hong Kong, as an important international financial center, boasts a mature financial industry ecosystem closely connected to the Chinese and major financial markets around the world. It has become a formidable competitor in stocks and bonds trading as well as traditional services such as asset management, banking and insurance, but people may wonder whether there is room for further or sustained growth in the future.

In the 14th Five-Year Plan for national socioeconomic development (2021-25), approved by the National People’s Congress earlier this year, the central government assures the Hong Kong Special Administrative Region of continued support in elevating its position as an international financial center, strengthening its capabilities as the leading global offshore renminbi trade hub as well as an international center for asset management and risk management, including deeper and more extensive connectivity between financial markets in the mainland, Hong Kong and Macao. In the coming years, Hong Kong should seize the opportunities created by the new national development strategy by focusing on the following three major aspects of financial market development. 

First, the city should strengthen its capabilities as the leading global offshore yuan trade hub, which dovetails with the country’s renminbi internationalization strategy. It is only a matter of time before China replaces the US as the largest economy in the world, with the yuan gaining ground as a dominant foreign reserve currency in denomination, exchange, clearance and settlement of international trade and financial transactions. In other words, the renminbi will become a full-fledged international currency for sure. That means it must be fully exchangeable under capital accounts, which must be fully open. Before the renminbi becomes a fully convertible currency, Hong Kong can and should serve as the channel of choice for the mainland in attracting foreign investment by building up an effective business network matching its leading global offshore yuan trade hub status and fostering a rich, diverse and far-reaching ecosystem of yuan-denominated international business and trade. Those are necessary and handy for Hong Kong to maintain or even enhance its international financial center position even after yuan capital accounts are fully open in the future. 

The development opportunities arising from this once-in-a-century paradigm shift in global power balance are Hong Kong’s to lose if it fails to integrate its own development into the overall development strategy of the country

Second, the SAR should build up an international hub of environmental, social and corporate governance investment, also referred to as green finance, driven by the global trend of putting more emphasis on sustainable development. Hong Kong is already a leading green financial center in Asia, boasting enviable market depth and global reach afforded by mature financial infrastructure, unique geolocation, quality professional service prowess of business talent and solid education foundation. All these qualities and capabilities bode well for maintaining its edge in ESG investment growth and future prospect as an international center of sustainable finance and investment.

Third, Hong Kong should establish and develop a digital-asset trading and management center. The human society is witnessing fast digitalization and virtualization of everyday life as artificial intelligence, cloud computing, the internet of things and blockchain technology grow and spread around the world. Today, mainstream financial institutions are increasingly aware of the growth potential of virtual assets, decentralized finance, non-fungible tokens and the metaverse, the latest fad, which are attracting investors hungry for new and promising market sectors. Hong Kong is blessed with an unmatched free market environment, strong attraction to capital and talent from around the world, a well-developed and maintained financial infrastructure, and a legal system necessary for becoming a leading international center of digital-asset trading and management in Asia and even in the whole world through a sophisticated digital-asset trading ecosystem complete with effective market regulation and resource cultivation.

Hong Kong’s future economic development relies on the continued expansion and upgrading of its financial capabilities as well as innovation and technology input, as well as taking full advantage of the potential of the huge mainland hinterland. The reality is Hong Kong’s economic development is an integral part of the national development strategy; the city’s future and its populace’s well-being hinges on how well the national economy does to a large extent. The development opportunities arising from this once-in-a-century paradigm shift in global power balance are Hong Kong’s to lose if it fails to integrate its own development into the overall development strategy of the country.

The author is senior research officer of the One Country Two Systems Research Institute.

The views do not necessarily reflect those of China Daily.