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  • Zhou Zing & Orange Wang

Hong Kong protests fail to slow city’s role as foreign investment gateway to China, government data

Hong Kong’s role as the primary gateway for long-term international investors to transfer money into China has remained largely intact despite the city being hit by increasingly violent anti-government protests, according to data released by the Chinese government.

According to the figures from China’s Ministry of Commerce, Hong Kong remained the dominant source of foreign direct investment entering China in June, July and August when the city grabbed global headlines for the protests triggered by an extradition bill that has since been withdrawn.

China received US$62.9 billion in foreign direct investment via Hong Kong in the first eight months of this year, accounting for 70 per cent of total inflows, according to the figures released on Tuesday.

The ministry did not release a breakdown of individual months, but according to calculations by the South China Morning Post based upon the official data, China received US$7.53 billion via Hong Kong in August, a hefty rise of 29.2 per cent from the same month last year.

In July, China received US$5.28 billion foreign direct investment inflows from Hong Kong, a slight fall from US$5.35 billion in July 2018, while in June that coincided with the start of the protests, flows from Hong Kong to China stood at US$12.19 billion, a modest rise from US$11.85 billion a year earlier.

Overall, in the three-month period from June to August, investment flows from Hong Kong into China were US$25 billion, a rise of 8.6 per cent from the same period in 2018.

While the official figures could be premature in measuring investment sentiment, partly because large foreign direct investment decisions typically involve many months of planning, the stability in the data could indicate the resilience of Hong Kong.

'The Chinese part of [foreign direct investment] flows from Hong Kong is unlikely to fall but rather to rise,' Sheng Liugang, associate professor at Chinese University of Hong Kong

It has held a long-standing position as a bridgehead for overseas investors to access China and an irreplaceable role for “China money” to be disguised as “foreign money” before being invested back into mainland China to access preferential policies.

Sheng Liugang, an associate professor in the department of economics at the Chinese University of Hong Kong, said a certain part of foreign investment from Hong Kong to China actually originates from mainland China, and it is quite common for speculators to make investments in name of their Hong Kong corporate vehicles to qualify for favoured treatment aimed at overseas investors.

“The Chinese part of [foreign direct investment] flows from Hong Kong is unlikely to fall but rather to rise,” Sheng said.

At the same time, investments from the United States and the European Union going through Hong Kong may fall over time as the city’s “connector” role between China and the outside world moderates over the long run, according to Sheng.

Lu Ting, the chief China economist at Nomura, said the Hong Kong protests are just one factor affecting long-term investment decisions into China, along with Beijing’s policies on foreign investment and the China-US trade war.

The escalation of the trade war between China and the US is probably having a bigger influence in corporate boardrooms than the Hong Kong protests, Lu said. However, the Hong Kong government’s handling of the protest situation in the coming months will be closely watched by the international investor community to see whether the city’s financial centre status and investment gateway function will be weakened, he added.

The unrest over the last 100 days has already delivered a heavy blow to the city’s tourism and retail industries, while the temporary occupations of Hong Kong International Airport also resulted in a sharp fall in passenger traffic, with nearby Guangzhou and Shenzhen reporting increases.

The impact of the protests also promoted both Fitch and Moody’s international rating agencies to downgrade the city’s credit rating and warn of further cuts if the impasse continues.

Speculators, though, who had attempted to make a quick profit by betting on a plunge in Hong Kong stock prices or a break in the local currency’s peg to the US dollar may have failed as the city’s financial market remained strong, showing the resilience of the city as a global financial centre.

China’s state media, without offering evidence, claimed that hedge fund manager George Soros and other international investors had tried to short Hong Kong stocks in August, but hit a wall after the Hong Kong government decided to officially withdraw the much-hated extradition bill in early September, resulting in a significant market rebound.

The South China Morning Post was unable to reach Soros’ representatives for a response to the claims.

Hong Kong’s benchmark Hang Seng Index has lost less than 4 per cent since early June. The Dow Jones Industrial Average and the Shanghai composite index have both outperformed the Hang Seng over the same period, although the Hong Kong index has held firm above the key psychologically important level of 25,000.

Two out of three companies that had delayed initial public offerings on the Hang Seng Index have also since restarted the listing process in Hong Kong.

The Hong Kong dollar’s peg to the US dollar remains safe, protected by a foreign exchange reserve of US$432.8 billion as of the end of August despite a record monthly drop of US$15.6 billion.

The Bank of International Settlements said this week that Hong Kong’s share of global foreign exchange trading has risen one percentage point in the last three years and is now just behind Singapore, while the city remained the dominant offshore yuan trading centre, based upon a survey conducted in April.

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