BREAKINGVIEWS-Wall Street finds limits in Hong Kong’s comeback

By Una Galani

HONG KONG, Nov 5 (Reuters Breakingviews) - A sense of relief permeated Hong Kong’s annual gathering of Global Financial Leaders this week as a truce in the Sino-American trade war and a rebound in Chinese equities set a relaxed tone for discussions. An impressive roster of executives, including Carlyle CG.O CEO Harvey Schwartz and Macquarie MQG.AX CEO Shemara Wikramanayake, convened at the Rosewood hotel - recently crowned the world's best - to discuss global trade, private markets and energy. At a dinner the night before, delegates watched a robot demonstrate boxing and were introduced to the city's most extreme trail runners. Yet even as the mood in Hong Kong brightens, the opportunity for global firms is shifting.

Four years ago when the city’s de-facto central bank hosted its inaugural summit, the goal was to signal Hong Kong was back open for business. At the time, the COVID pandemic had isolated the territory and local protests sowed doubt over its future as a global financial centre. Many even doubted Beijing’s own support for Hong Kong. The threat of the U.S. turning financial weapons it had aimed at Russia on China also led to questions about the feasibility of Wall Street maintaining its presence in the People’s Republic.

Now that the prospect of full financial decoupling has receded a bit, visiting executives did not need to tiptoe around the topic of China. Brookfield BN.TO CEO Bruce Flatt and Blackstone BX.N COO Jon Gray even struck an optimistic tone on pockets of Hong Kong’s depressed real estate. And a line-up of Chinese officials re-iterated the motherland's determination to strengthen the financial centre, including through measures to boost offshore yuan liquidity in Hong Kong.

Eddie Yue, CEO of the Hong Kong Monetary Authority, also had plenty to tout to international investors who have pulled out funds: so far this year, China’s CSI 300 Index .CSI300 is up by a nearly a fifth, while Hong Kong’s Hang Seng Index .HSI is one of the world's top performers with a 28% gain.

Not that leaders like Morgan Stanley MS.N CEO Ted Pick, his counterpart at Goldman Sachs GS.N David Solomon and UBS UBSG.S Chair Colm Kelleher needed extra reasons to convene. For banks and fund managers, the HKMA is a heavyweight client distributing lucrative mandates as custodian of Hong Kong’s HK$4.3 trillion ($554 billion) Exchange Fund.

The question is no longer whether U.S. financial firms can maintain their presence in China, but how much business they can continue to capture. Despite the geopolitical tensions, Wall Street has not retreated: cross-border claims on Chinese residents by American banks are close to an all-time high, according to data from the Bank for International Settlements. This captures loans by U.S. banks to Chinese borrowers -- and to their own Chinese subsidiaries.

Ultimately, the fortunes of Hong Kong - a gateway between global investors and mainland markets – remain deeply tied to those of China, whose economy is grappling with deflationary pressures, its own prolonged property crisis and sluggish consumption. The International Monetary Fund expects China’s GDP growth will slow to 4.2% next year, down from 4.8% this year.

This is a problem. Offshore investment banking revenue from Chinese clients, though rebounding, remains below levels in the first seven years of the past decade, according to Dealogic. Rising global protectionism has curbed the ability of Chinese companies to acquire overseas assets. U.S. banks' share of that reduced offshore revenue has also shrunk to 39%, down from 45% in 2020, as Chinese banks gain in key businesses. However, overall Chinese investment banking fees are trending back up to 2021 levels, LSEG data shows.

Equity capital markets have emerged as a bright spot, with BYD 002594.SZ, Xiaomi 1810.HK and Contemporary Amperex Technology 300750.SZ delivering three of the world’s five largest deals in the first half of the year. Total issuance is on track to approach $100 billion in 2025, approaching levels last seen in 2020 and 2021, according to Dealogic. Western banks — led this year by Morgan Stanley and Goldman Sachs, with UBS close behind—continue to dominate the league tables.

Yet here too there is change. While Hong Kong is holding the global crown for new listings, the debuts are dominated by Chinese firms whose shares already trade on New York or mainland bourses. Secondary listings – which typically generate lower fees and favour domestic advisers – now account for the majority. CITIC Securities 600030.SS has sponsored 29% of new listings so far this year, up from 8% in 2021 and just 5% a decade ago.

And even if Hong Kong makes progress in attracting non-Chinese issuers, Western banks may be sidelined there too. Take Dubai-headquartered Softcare 2698.HK, which sells diapers across Africa, Latin America and Central Asia: its planned $300 million offering is backed exclusively by Chinese sponsors -- CITIC, CICC and GF Capital – leaving little room for international players. Despite this shift of power, Zhang Hui, vice chair and president of Bank of China 601988.SS, was the only prominent executive from the domestic competition on the programme of the first full day of the summit.

Of course, China still matters greatly to global banks. It accounts for 63% of Asia Pacific ex-Japan investment banking fees, according to LSEG data, and such rankings only capture part of the business opportunity. U.S. heavyweights like Citigroup C.N and JPMorgan JPM.N provide global companies operating in China with hedging, corporate banking, cash management and trade finance services. Banks also still rely heavily on people in Hong Kong to service their operations in other parts of Asia. Meanwhile, wealth management will continue to grow in importance with Hong Kong expecting to become the world's largest centre in the coming years.

If Hong Kong can broaden its appeal beyond China -- and if Chinese firms can win more global acceptance -- Western financial firms could enjoy a proper resurgence. For now, Hong Kong is settling into a new normal that may offer them fewer, less lucrative opportunities.

Follow Una Galani on Linkedin and X.

CONTEXT NEWS

The Global Financial Leaders’ Investment Summit will be held in Hong Kong from November 3 to November 5. The gathering is organised by the Hong Kong Monetary Authority. The first summit was held in 2022 to mark the financial hub’s re-opening after the Covid pandemic.