Hong Kong’s Economy Is Still Important to the Mainland, at Least Financially

Beyond funding, Hong Kong is China’s most important springboard for foreign direct investment, either into or outside China. In particular, 64% of Mainland China’s inward FDI comes from Hong Kong and between 2010 and 2018, 65% of outward FDI was channelled through Hong Kong. The high share indicated Hong Kong’s role as the immediator between China and the West, which is due to the trust of Chinese and foreign firms on Hong Kong’s institutional framework and funding pool for their investments. In the specific case of mergers and acquisitions, Hong Kong has played a key role as its unique status has facilitated Chinese companies’ overseas acquisitions.

In addition, Hong Kong has long been China’s largest offshore RMB centre, for long a key policy initiative of the Chinese government in its pursuit of a staggered opening of the capital account. Other than RMB settlements, Hong Kong also holds a special access to China’s equity and fixed income markets, though the Stock and Bond Connect.

Therefore, Hong Kong’s role as the China’s financial arm for the rest of the world has helped Mainland China in keeping its financial sector insulated without suffering the negative consequences of such isolation, i.e. limited access to finance or difficult access to assets in the rest of the world. In essence, Hong Kong has long been China’s financial firewall.

The second important aspect to consider is that Hong Kong’s financial system is increasingly dominated by Mainland Chinese banks. At the same time, overseas bank assets held by Mainland Chinese banks are also heavily concentrated in Hong Kong. The large exposure means that the destiny of Hong Kong as an offshore financial centre affects China even more than it affects those from the rest of the world. Mainland Chinese financial institutions have expanded 3.2 times since 2010, reaching USD 1.2 trillion and have had a much higher growth rate than the rest of the banking sector.

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