Hong Kong's Status as an International Financial Center at Crossroads

Hong Kong
Hong Kong (Pixabay/MarciMarc105)

Hong Kong, once a global financial hub, has lost its shine in recent years, leading to calls for a reassessment of its position. According to the latest Global Financial Centers Index, Hong Kong remains in fourth place, but its ranking has slipped to ninth in the Economist Intelligence Unit (EIU)'s global business environment ranking.

The future development of Hong Kong's economy hinges on two main paths: expanding its reach into new markets, such as the Middle East, or deepening its integration with mainland China to achieve mutual benefits.

The Chinese central government's support for Hong Kong is unwavering, as evidenced by the Closer Economic Partnership Arrangement (CEPA) and the recent China Securities Regulatory Commission's "New Five Measures" aimed at bolstering Hong Kong's status as an international financial center.

Obstacles Faced By Industry Figures, Businesses and Investors

However, businesses, investors, and even ordinary citizens face significant challenges with foreign exchange controls being a major obstacle.

Billionaire investor Mark Mobius, the "Emerging market guru" fund manager, said in March last year that he was unable to transfer funds from his Shanghai HSBC Bank account to overseas, encountering various hurdles along the way.

Hong Kong businessman Shih Wing-ching, the founder of Centaline Property Group, also recently wrote an article highlighting that many mainland clients want to buy property in Hong Kong but cannot bring their funds out of the mainland. If the central government could relax its restrictions, Hong Kong's property market would not have to worry about a lack of funding.

Meanwhile, a scandal in Hong Kong's insurance industry is spreading to the entire wealth management sector, even implicating ordinary citizens.

The incident stems from a Hong Kong insurance agent who revealed that he was under investigation by the Jiangyin Public Security Bureau in Jiangsu Province. He was fined millions of yuan by the State Administration of Foreign Exchange and may face criminal charges from the local procuratorate.

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As Hong Kong actively positions itself as a wealth management center for Asia and the world, mainland Chinese clients are a key target market for various financial products. However, under current regulatory policies, the future of this sector is uncertain.

China's foreign exchange restricts the outflow of funds from the mainland. Individuals can only remit a maximum of 50,000 USD per year, and the limit for carrying cash of local currency out of mainland is 20,000 CNY.

Cross-Border Capital Flows and Hong Kong's Uncertain Future

Due to these limitations, many mainland Chinese people resort to "ant-moving" methods or use underground money changers to transfer funds from the mainland to Hong Kong. Similarly, Hong Kong residents or overseas investors who want to invest in the mainland's property and stock markets often use Hong Kong-licensed money changers for two-way remittances.

In the past, mainland authorities often overlooked cross-border capital flows between Hong Kong and the mainland if they were not involved in illegal activities. Even when enforcement did occur, it was mostly in the form of fines.

However, several Hong Kong insurance agents have recently reported being fined by the State Administration of Foreign Exchange and receiving calls from mainland police departments requesting them to return to the mainland to assist in investigations, with the possibility of facing criminal charges for illegal business operations.

By extension, not only Hong Kong insurance professionals but also the entire wealth management industry face significant legal risks. Even ordinary Hong Kong citizens who want to invest in property on the mainland using money changer services could inadvertently break the law.

Ordinary Hong Kong citizens also need to transfer funds in and out of Hong Kong and the mainland. However, if a citizen has property on the mainland and sells it, they can only remit a maximum of $50,000 per year. They could commit a crime if they use other methods to remit funds. Restrictions on capital outflows are not the only hurdle; capital inflows to the mainland are also limited. While the mainland economy remains sluggish, there are business opportunities everywhere. If investors want to take advantage of this situation to make large investments in the mainland, they could also run into trouble using the wrong methods.

Cross-border capital flows are a natural part of Hong Kong's integration with the mainland. However, with restrictions on capital outflows from the mainland and selective enforcement by individual mainland departments, what will become of Hong Kong's status as an international financial center? Similarly, restrictions on capital inflows are not good for the development of the mainland economy. Under China's foreign exchange controls, the inability of capital to flow freely between the two regions will ultimately make investors, businesses, and citizens on both sides losers.

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