Wealth managers and financiers have been closely observing recent developments in Hong Kong, reappraising its attractiveness as a global investment hub. Ever since the Chinese government’s initial attempt to implement its now-abandoned extradition bill in 2019, growing public discontent in Hong Kong has highlighted the simmering tensions that exist between the major political factions.
With an established presence in Singapore and professional ties to Hong Kong, Butterfield has witnessed first-hand just how the current civil unrest is affecting capital flows. Many with vested interests in the jurisdiction are considering alternative investment strategies. However, there is a clear distinction between the older and younger generations of Hong Kong residents when it comes to managing their wealth.
Older generations have much of their capital tied into real estate assets, making it difficult to quickly liquidate capital and diversify their holdings outside the jurisdiction. In contrast, younger people in Hong Kong are less financially entrenched within the jurisdiction, and are far more likely to reinvest capital in neighbouring cities, countries, and markets.
A repeat of 1997?
To appreciate where Hong Kong residents may now be seeking to reinvest, we can look back to history for useful comparisons. When the UK first returned Hong Kong to China in 1997 – the beginning of “One country, two systems” – there was a noticeable exodus of international and domestic capital to other markets. Uncertainty regarding the transition had investors fearing that their portfolios could be at risk in China, with some estimates claiming that the ensuing capital flight totalled $29.23 billion USD between 1998 and 1999.
The majority of these funds and assets were moved to areas that were British Overseas Territories and crown dependences, mainly due to their legal and regulatory alignment with the UK. Politicians in Singapore, Bermuda, the Cayman Islands and The Bahamas all heartily welcomed the flow of direct foreign investment which had previously been located within Hong Kong.
Butterfield, which already had an established offshore presence, assisted clients who were participating in this flight of capital away from Hong Kong throughout the 1990s. As a result, these island nations were able to establish themselves further as bona fide, attractive offshore investment locations.
The question now is whether this process will repeat itself. Will political instability and civil unrest result in a second mass exodus of capital from Hong Kong, or will Hong Kong’s slow alignment with China signal a return to more stable trading conditions?
At this point, it is too early to say. However, now is an ideal time to consider which markets offer the same favourable conditions as Hong Kong and serve as worthy alternative destinations should investors be seeking an exit.
When comparing today to the exodus of capital of 1997-1999, there are a few locations which look set to once again experience a mass transfer of wealth over from Hong Kong.
Singapore, for example, is ideally placed for such a transfer. With a stable government and easy access to both emerging and established economies, it offers diverse avenues for wealth management. What’s more, it is located in the heart of Southeast Asia with direct trade links to both China and India.
A survey last year by Singapore’s American Chamber of Commerce showed that, out of businesses seeking to relocate out of Hong Kong, 90% identified Singapore are their primary choice.
Also, in 2019 the city-state enjoyed approximately $92 billion worth of foreign direct investment, an increase on the $72 billion it had enjoyed the year prior. Additionally, Singapore is regularly ranked no. 1 or 2 in the World Bank’s Ease of Doing Business rankings, and hosts the region’s fastest growing insurance and wealth management hubs.
The city is not without its limitations, however. It cannot offer the same level of access to Chinese markets that Hong Kong enjoys, and Singapore stock market’s equity capitalisation of $665 billion is dwarfed by Hong Kong’s $4 trillion.
Looking beyond Asia
On the other side of the world, London stands out as an appealing choice for those not constrained by geographical distance in our hyper-globalised world.
The sheer variation of investment opportunities in the UK’s capital makes it a top destination for foreign direct investment. Between October 2014 and September 2019, it hosted 2,257 direct investment projects; the biggest number of projects of any major European city. It is also commonly ranked as one of the world’s top financial capitals, serving as the European headquarters for approximately 60% of the Fortune 500 companies.
Despite the obstacles posed by COVID-19 and Brexit, London still outperforms its international counterparts when competing for global investment hub status. Bureau van Dijk recently reported that the city attracted significantly more greenfield foreign investment than Singapore, Paris, Dubai, Shanghai, and New York.
Of course, should current unrest in Hong Kong subside, it’s possible this forecasted repeat of the 1997 capital flight may not occur, and residents may keep their wealth within the special administrative region. What is most needed in any financial market is stability and certainty.
Only by committing to either further alignment with China, or fully-fledged democracy will Hong Kong instil the confidence needed to maintain its current attractiveness for investment, commerce and global trade. Importantly, there are viable market alternatives for those looking beyond Hong Kong, with Singapore offering access to emerging markets in the region, and London offering stability and a diverse collection of asset and fund options.
As always, any major financial decision should only be made following careful consideration and research. For this reason, it is always advisable to seek out the assistance of financial institutions and wealth managers with the experience, knowledge and expertise of effectively managing wealth and capital during times of uncertainty and market volatility.
Nir Sadeh is the Senior Vice President and Head of Private Banking at The Bank of NT Butterfield & Son Limited (headquartered in Bermuda with operations in ten jurisdictions). Nir Sadeh also leads Butterfield’s International Wealth Banking unit, which provides bespoke banking services to international families with interests in multiple jurisdictions.