China’s financial hub status faces new setbacks

Hong Kong's status as a global financial hub is facing increasing challenges.

A recent advisory from the US is urging American companies operating in the city to weigh the legal and regulatory risks they may encounter, including potential violations of sanctions. The alert suggests that doing business in Hong Kong now carries similar risks to operating in mainland China, due to the alignment of Hong Kong’s national security laws with Chinese legislation, Caliber.Az reports, citing foreign media.

While Hong Kong's role as a prominent financial centre has evolved, it has not disappeared. The city’s authorities must acknowledge that it no longer serves as a cornerstone of the US-led Western financial order. Its future is increasingly aligned with China and, by extension, with countries such as Russia. In response, Hong Kong officials have criticized the US advisory, accusing it of stoking “panic.”

They highlight the city’s strong showing in the World Competitiveness Yearbook by the International Institute for Management Development, where it ranked fifth, and its status as the fourth-largest recipient of foreign direct investment. They argue that these factors suggest the advisory will not tarnish Hong Kong's financial reputation. However, these figures do not capture the complete picture. Bloomberg Intelligence reports that Hong Kong’s growth is expected to slow to 2.4 per cent this year, largely due to China’s economic downturn. The city had adopted Beijing’s stringent Covid-19 measures, including prolonged border closures and isolation.

Despite high expectations for recovery once restrictions were lifted, the rebound has been underwhelming, resulting in only modest progress following an initial surge. Retail sales and visitor numbers have yet to return to pre-pandemic levels, reflecting a decline in confidence both within and outside Hong Kong. US-China tensions and Beijing’s increasing control over the city further exacerbate the situation. The geopolitical rivalry, intensified by former President Donald Trump’s trade war with China, has left Hong Kong in a precarious position. Compounding these issues is Hong Kong’s deteriorating reputation as a hub for illicit trade. 

The US advisory highlights that “Russia is increasingly leveraging third countries like Hong Kong to evade sanctions and procure critical items.” Washington accuses Hong Kong of serving as a transshipment point for dual-use goods re-exported to Russia, thereby aiding its war efforts against Ukraine. Hong Kong maintains it only adheres to United Nations sanctions, a position made easier by the fact that the UN’s effectiveness is hindered by Russia’s veto power as a permanent Security Council member.

According to the Carnegie Endowment for International Peace, this alleged sanctions evasion is tied to Hong Kong’s growing alignment with China. The city is now seen as part of the emerging China-Russia axis, with President Xi Jinping and Russian President Vladimir Putin strengthening their ties, claiming they are “at their best in history.” The State Department’s Investment Climate 2024 report indicates that Hong Kong’s once-independent legal system has been compromised, raising concerns about the rule of law—a key factor that has traditionally attracted international businesses to the city. 

Additionally, human rights and press freedoms are under pressure. Despite these challenges, Steve Vickers, CEO of Steve Vickers and Associates, a political and corporate risk consultancy, argues that Hong Kong’s story isn’t over. Instead, the city is shifting its role from being a gateway to China for Western investors to becoming a central financial hub for China. Companies seeking to access the vast Chinese market will continue to operate in Hong Kong, as will those from the mainland. China was the leading source of investment in Hong Kong in the first half of this year. 

This influence is also evident in the equity markets, with 1,447 mainland firms listed on the city’s exchange by the end of 2023, representing 77 per cent of the total market capitalization. Beijing's influence in Hong Kong is expected to increase. The city is increasingly embodying the “one country, one system” principle, as shown by recent changes to the school curriculum. Secondary students are now required to study “Xi Jinping Thought,” reflecting an ongoing effort to instill Communist Party ideals in Hong Kong’s youth. Regardless of who wins the US presidential election this November, no significant change in US policy is anticipated. 

For companies that still view Hong Kong as a regional hub, adherence to compliance regulations is crucial to avoid sanctions. It’s important to understand the risks involved—such as trading restricted stocks and scrutinizing cross-border data transfers. The financial sector should also continually address the challenges of operating in this environment, both publicly and in private dialogues with the government, which aims to restore Hong Kong’s status as the region’s leading business center. Hong Kong’s reputation has already suffered significant damage. Ignoring the reality only postpones the inevitable. Immediate damage control measures are essential.