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  • Mike Bird

Hong Kong Is the Lung Through Which Chinese Banks Breathe

“The naked truth about Hong Kong’s future can be summed up in two words: It’s over,” said Fortune Magazine.

Certainly, there are plenty of pessimists who believe the city’s fragile role as a hub pinned between the People’s Republic of China and the global financial system has run its course.

But Fortune’s naked truth was delivered 24 years ago, and Hong Kong has been strangely resilient. Indeed, the rise of Chinese banks has cemented its role rather than weakening it. As they have pursued international ambitions, the city has been their natural springboard.

In consulting firm Z-Yen’s Global Financial Centers Index, Shanghai has climbed to within an inch of Hong Kong. But the two cities are as complementary as they are competitive. Chinese lenders have swelled—they invariably top rankings of the world’s biggest banks—but have yet to demonstrate that they can achieve their burgeoning international ambitions from home.

Data from the Bank for International Settlements illustrates Hong Kong’s banking-hub status: Of the $1.548 trillion in cross-border lending extended by banks in the city, less than 4% is from banks based in Hong Kong. The rest is from branches and subsidiaries of banks based elsewhere.

Even with the rise of Shanghai, China’s figures are the other way round. Only a bit more than half of the $2.2226 trillion in international claims that the country’s banks report as of March 2019 was actually booked at home. Much of Chinese banks’ overseas business is funneled through their operations in Hong Kong, where their assets have risen nearly fivefold over the past decade—accounting for more than half the growth of the city’s banking industry as a whole.

As a second home for Chinese finance, it stands alone. Of the global subsidiaries of Chinese banks, 416 are in Hong Kong, according to research led by Fenghua Pan, an associate professor of economic geography at Beijing Normal University. Macau is second with 47, followed by Singapore with 19, New York with 16 and London with 14—not in the same league.

It is hard to imagine financial authorities anywhere else being able to work as closely as those of Hong Kong and mainland China.

Beijing also needs the city to facilitate its wider ambitions. The Chinese yuan’s international role relies on Hong Kong’s position in global finance. Singapore processes 3.5% of international yuan-denominated transactions, according to payments company Swift; Hong Kong, 75.5%. Their shares have changed little in the past five years.

Repeated predictions of Hong Kong’s demise as a banking center, in favor of Shanghai, have been based on similar misunderstandings. The city’s evolving role as the starting line for Chinese financiers entering the wider world would be almost impossible to replace. As long as China thrives, so will Hong Kong.

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