Impressions from Hong Kong trip

After a hiatus from the blog, I am happy to write about my recent 3 1/2 weeks to Hong Kong.  It was a pleasant and fruitful trip - I not only met many family members and old friends, but also caught up with personal friends and old friends from the broker and investment community. 

Hong Kong is as usual full of energy, convenience, variety and opportunities.  No one would disagree that much of its dynamism is because of its close relationship with and dependence on China.  There are many reasons for China-related fund flows into Hong Kong. 

About 2 1/2 million mainland Chinese tourists visit Hong Kong per month (HK has a population of 7 million); and this number is expected to increase about 15%-20% this year.  Hong Kong is the favorite place for the mainlanders to shop for LV bags, watches, apartments and even milk powder.  Mainland Chinese buyers are particularly hot on Hong Kong apartments apparently because many apartments have harbour view (a luxury item in China), the amenities in Hong Kong are better than those of mainland, Hong Kong is still a China city and so is close to home, and many apartments can be found close to the airport (for example West Kowloon).

The other reason why Hong Kong attracts a lot of "hot money" is that Chinese Reminbi (RMB) liberalization is speeding up.  At the beginning of every recent new 5-year plan, RMB liberalization has been hailed as a priority for the government. At the start of the 12th 5-year plan, officials expect the capital account to be convertible by 2020. RMB internationalization has taken a huge step, e.g. mainland companies to finance their overseas direct investment in RMB, cross boarder RMB trade settlement for exporters, etc. RMB deposit has risen to over RMB300 bn in Hong Kong (one of the 4 RMB offshore centres), that is about 0.3% of onshore deposit base and about 4 to 5% of HK’s total deposit base or broad money (M2), compared to only RMB50bn bonds issued in Hong Kong.  Investment analysts/economists expect RMB deposits to rise to 15% of M2 by end of 2011 and eventually one-third to one-half of HK's M2. One could envisage 50-50 RMB and HKD currency floating in HK eventually. Currently, limit on individual currency conversion and the lack of RMB product diversity is constraining the pace of RMB internationalization.
More implications for Hong Kong:
• With the fast rising amount of money going to RMB deposits in HK, but only limited absorption of this liquidity in terms of bond issue (RMB-denominated shares available later this year), the excess liquidity is going to HK loans/stock/property market (with HK property market a more worrying bubble than that of China.)
• RMB business will drive the HK stock exchange, banking, insurance and asset management sectors; mainland Chinese banks are increasingly targeting Hong Kong bank for mergers and acquisitions.
• Promoting Chinese financial companies and global investments through Hong Kong. Note the big global hedge funds prefer to set up offices in Hong Kong than anywhere else in Asia.
• More Chinese State-owned enterprises (SOE) flocking to issue RMB bonds or borrow in Hong Kong as funding costs are about 2% lower now in HK than mainland.

With its dependence on China which is booming, a rising tide lifts all ships in Hong Kong. But does it really?  The biggest looming worry is the younger generation of Hong Kong.  The young job seekers not only face rising land and housing prices, but also have to compete with the brethens and sisters from the North and students returning from overseas for job opportunities which require more and more special skills and higher education training.  The picture, courtesy of Alex Hofford, speaks to worsening Gini-coefficient. The government needs to focus on this younger segment of the population to create a more balanced growth of the economy.