Chinese Banks Expand in Hong Kong as Foreign Banks Retrench

Chinese firms' secondary listings in Hong Kong drive activity
August 22, 2020 Updated: August 23, 2020

News Analysis

The national security law imposed by Beijing on Hong Kong last month has been a boon for Chinese investment banks looking to take market share in the territory.

Hong Kong has traditionally been the place for mainland Chinese companies to raise debt and equity funding from foreign investors. And in this setting, Wall Street—not Chinese—banks have dominated the Hong Kong market in past years. But the national security law, which has begun to stifle freedom of expression, has accelerated a trend of retrenching by foreign banks.

Some banks, such as the London-based HSBC, are actively supporting the national security law. Others’ reactions are more muted. Citigroup CEO Michael Corbat told analysts during the bank’s second-quarter earnings call that Citi would “obey local laws” and that the bank is “fairly used to operating in charged or complex environments.”

The security law is just the latest challenge for foreign banks operating in Hong Kong, following increasing distrust of foreign companies, the CCP virus outbreak in nearby mainland China, and ongoing protests and police violence that have defined the city over the past year.

A study by the Financial Times this month found that finance professionals employed by mainland Chinese banks and brokerage firms number over 2,100, just shy of the approximately 2,500 working for Wall Street banks such as Citigroup, Morgan Stanley, and J.P. Morgan Chase.

The trend is stark looking back over the past seven years, as the numbers of bankers at foreign firms have fallen by around 300 while those at Chinese banks have swelled by more than 1,100. Those numbers represent bankers, traders, and other finance professionals licensed by Hong Kong’s Securities and Futures Commission.

For example, Deutsche Bank’s long-serving Hong Kong-based head of Asia Pacific, Werner Steinmueller, retired in July. His replacement, Alexander von zur Muehlen, will lead the company’s Asia operations, not from Hong Kong, but from Singapore.

A banker in Hong Kong who wished to remain anonymous recently told The Epoch Times that some senior leaders at Wall Street banks have already departed Hong Kong or announced their retirement months ago, a sentiment that’s corroborated by HR recruiters.

“The protests, the national security law, the pandemic, the trade war—it’s all accelerating this,” John Mullally, financial sector recruitment head at Robert Walters Hong Kong, told the Financial Times this month.

It appears that investors have also taken notice. Shares of Citic Securities Co.—China’s biggest investment bank—have jumped 31 percent since June 30, the day Beijing announced that the Hong Kong national security law was enacted. Prior to this, Citic’s shares were down 5 percent from Jan. 1 to June 30.

US Delisting Threat Drives Hong Kong Activity

Hong Kong Exchanges and Clearing (HKEX), which runs the main Hong Kong Stock Exchange, believes the ongoing U.S.–China economic row would bolster its prospects. The Trump administration’s consideration of delisting Chinese companies traded in the United States could force such companies to pursue a secondary listing in Hong Kong as a defensive measure.

Fifty-nine companies sold new shares in Hong Kong during the first half of 2020, raising $11 billion, making it the third-busiest bourse in the world in total proceeds, behind Nasdaq and the Shanghai Stock Exchange, according to data from financial services firm EY.

During the second quarter of 2020, Chinese tech giants JD.com and NetEase—whose shares are mainly listed in New York—raised over $6 billion combined in Hong Kong via secondary listings.

JD.com, China’s second-biggest online retailer, raised approximately $3.9 billion from the stock sale in June, which was the largest equity raise in Hong Kong so far in 2020. NetEase, a major mobile game publisher, sold around $2.7 billion in stock, also in June.

Both JD.com and NetEase are primarily listed in the United States. But they face prospects of being delisted as the Trump administration and U.S. Congress push for Chinese companies, whose traded American depositary receipts (ADRs) are exempt from certain U.S. regulatory and compliance measures, to increase their transparency. Reuters reported earlier this year that Nasdaq-listed Baidu also is planning a secondary listing in Hong Kong.

Business leaders mostly downplayed the increased scrutiny abroad for listing in Hong Kong. NetEase CEO William Ding wrote in a letter to shareholders that “returning to a market that is closer to our roots” was part of the reason for going to Hong Kong.

But the current secondary listing wave is likely to only offer a temporary boon to HKEX and the Chinese banks sharing in the public offering fees. One of the biggest concerns for Hong Kong’s pro-democracy protestors is Beijing’s increasing influence over the city.

The spate of mainland Chinese companies “returning home” to sell their stock in Hong Kong does little to alleviate such fears.