2024 Hong Kong Programs
INSIGHTS
2024 Executive Seminar • October 20-22, 2024
2024 Asia Pacific Roundtable • October 23-25, 2024
The Pacific Pension & Investment Institute (PPI) convened its 2024 Executive Seminar and Asia Pacific Roundtable in Hong Kong. The Executive Seminar, held on October 20-22, underscored Hong Kong’s evolving role in relation to mainland China and the world and featured business site visits in Shenzhen. The Asia Pacific Roundtable, held from October 23-25, explored the complex dynamics shaping the economic landscape in China and the region. These programs marked PPI’s return to Hong Kong for the first time since 2016, and the discussions reflected the starkly different domestic, regional, and global environments since then.
HONG KONG’S EVOLVING ROLE
Much has changed in Hong Kong in recent years following civil unrest, COVID-19, and increasing global geopolitical tension. Hong Kong’s critical competitive advantage has been its freeport status as a general gateway for international businesses into China and East Asia. This advantage, however, has come under strain and been directly impacted by global tensions. The change is visible on the ground. Compared to pre-pandemic levels, there are fewer expatriate workers, less tourism, and less business travel.
Investors and policymakers remain optimistic despite these global challenges impacting Hong Kong’s business vitality. They note that despite political changes, including increasing Chinese political and economic influence, Beijing remains interested in supporting Hong Kong as an entry point for foreign capital and business into China and a springboard for the international expansion of Chinese companies. With this economic function in mind, participants expect the one country, two systems approach to remain strong.
Business and policymakers stressed that Hong Kong’s status as a global financial center remains robust. Asia’s increasing wealth and the continued globalization of Chinese companies will support the city’s financial infrastructure. The city’s mature and well-regulated stock exchange and its role as a channel for foreign capital into mainland Chinese markets will remain differentiated. Furthermore, the city is proactively building regulatory infrastructure to become a leader in emerging cryptocurrency and fintech industries.
HONG KONG’S VALUE PROPOSITION TO INTERNATIONAL CAPITAL
Seventy percent of foreign direct investment into China, the world’s second-largest economy, and a similar percentage of China’s outward investment flows through Hong Kong. Given China’s current policy regime and President Xi Jinping’s emphasis on preserving Hong Kong’s financial value to greater China, this role as a gateway remains unlikely to be threatened.
In addition to the regulatory advantage as the conduit for capital into and out of China, Hong Kong’s monetary and regulatory authorities are also developing regimes to encourage the development of innovative forms of finance in the territory, including blockchain and fintech. Large cryptocurrency businesses have established operations or headquarters in Hong Kong because Hong Kong’s regulations are more predictable and robust than those of other major financial hubs, where cryptocurrency regulation is less well established.
Hong Kong is also working to establish itself as a hub for green bond issuance. While Hong Kong’s own carbon transition financing needs are limited, given the scale and sector focuses of the local economy, Asia accounts for more than half of the globe’s carbon emissions. The green bond program supports local issuance and seeding adjacent ratings, measurement, and other sustainability businesses that support green finance.
The Hong Kong Exchanges and Clearing Limited (HKEX) has focused on several strategic initiatives to enhance connectivity, diversify offerings, and improve sustainability. HKEX has expanded its “Connect” programs, which link mainland Chinese markets with Hong Kong’s capital markets. It recently added Swap Connect to facilitate bond trading and expand eligible stocks under Stock Connect, boosting trading volumes across these channels. The exchange is also proactively reaching out to capital pools in the Middle East, which are less susceptible to global market bifurcation. The internationalization of Chinese companies will be a natural driver of growth as they seek dual listings in Hong Kong.
HKEX also distinguishes itself by ensuring the high standards of governance of the companies listed. New listing regulations covering corporate governance, reporting, and environmental, social, and governance (ESG) issues seek to attract new listings and boost investor confidence. HKEX is especially focused on ESG and will ban single-gender boards.
A PREMIER LISTING DESTINATION
Hong Kong’s legal system is rooted in the English common law system. The Sino-British Joint Declaration of 1984 set the conditions for Hong Kong to be transferred to Chinese control in 1997. This declaration granted Hong Kong a high degree of legal autonomy, except in foreign affairs and defense. The Hong Kong Basic Law, enacted in 1990, further enshrined Hong Kong’s legal system to give effect to the “One Country, Two Systems” approach. In 2014, Beijing released a policy report asserting its authority over Hong Kong and stating that in the event of a conflict between the “one country” and “two systems” principles, the “one country” principle would prevail.
Following the 2019 protests, Hong Kong’s business community has waited for Beijing’s response and evaluated how the evolving political situation may impact the city’s ability to continue as a financial hub. Both immediately after the protests and during President Xi’s visit to Hong Kong in 2022, Beijing has continued to support Hong Kong’s relative legal independence regarding its ability to serve as a business investment hub.
Notably, President Xi has directly expressed his support for the “one country, two systems” approach, noting that Hong Kong’s function as a financial center benefits not just Hong Kong but the entire Chinese economy. Hong Kong’s markets continue to raise capital for investment in China and help Chinese companies raise offshore capital for global expansion.
MAINTAINING THE RULE OF LAW
Hong Kong is surrounded by the growing commercial power of the Greater Bay Area (GBA), which encompasses several neighboring cities in Guangdong province. The GBA began its path towards internationalization in the 1980s, as power was devolved to particular trade and economic zones in the region.
While geopolitical competition and protectionism may harm some of the region’s exporters, competition drives the development of parallel tech ecosystems. One is centered around U.S. tech champions, and the other is rooted in Chinese tech leaders, many of whom are based in the GBA. The size of the GBA and Chinese markets enables the continued development of this tech ecosystem, which was initially produced for local consumers but is now expanding globally.
The region has many strengths, including human capital, a concentration of engineering talent, favorable government policy, and robust transportation infrastructure. As the U.S. and Chinese markets continue to bifurcate, the Chinese government is proactively building trade ties across the global south, a burgeoning market for the GBA.
THE GREATER BAY AREA AND ITS OPPORTUNITIES
FOREIGN EXECUTIVES IN HONG KONG AND CHINA
The number of foreign executives in China declined during the pandemic, leading some commentators and Chinese officials to believe that the Chinese and Western economies may be decoupling. However, in the current period of lower economic growth, local governments are incredibly welcoming of foreign companies and executives. This is especially true in secondary and tertiary cities, which struggle to differentiate themselves in China’s ultra-competitive business climate.
SPOTLIGHT: PHILANTHROPY AND THE HONG KONG JOCKEY CLUB
Horse racing has long played a critical cultural role in Hong Kong. During his 1978 visit, Deng Xiaoping reportedly said, “Horse racing will continue, and dancing parties will go on.” This statement symbolizes Deng’s pragmatic approach toward Hong Kong’s future under Chinese rule. He used it to assure Hong Kong residents that their unique lifestyle, horse racing tradition, and Western cultural influences would be preserved despite the planned handover to Chinese sovereignty in 1997.
Today, the Hong Kong Jockey Club, a non-profit organization with 35,000 members, organizes racing twice weekly on Hong Kong Island and in the New Territories. In addition to racing activities, the Jockey Club organizes horse racing and soccer betting and operates the territory’s lottery. The economic scope of these activities is substantial: the club generates approximately 39 billion USD in gross revenue, about 5 billion USD in tax revenue, and about 1 billion USD in annual charitable expenditures. The club manages an endowment to fund its long-term philanthropic spending, the size of which would place it among the top ten charities globally.
BUSINESS SITE VISITS IN SHENZHEN
Executive Seminar delegates undertook a day trip to Shenzhen, where they visited two sites that illustrate two contrasting yet equally significant trends in China: innovation and demographics. At the global headquarters of electric vehicle company BYD, the PPI delegation was welcomed by company leaders and toured its showroom. Afterward, the group visited Taikang Peng Garden, an elderly care facility run by one of China’s largest insurance groups. This facility is a real-world example of how commercial enterprises respond to China’s aging demographics.
THE LONGEVITY CHALLENGE AND RETIREMENT GAPS IN ASIAN SOCIETIES
Increasing longevity and declining birth rates have led to rapidly aging demographics in multiple East Asian countries. Japan’s demographics are among the oldest in the world, and the decline of Japan’s birth rate accelerated during and after the COVID-19 pandemic. Increasing the birth rate and increasing immigration could present solutions; though policies to promote family creation have been ineffective, immigration has remained politically unfeasible.
China’s current population is not as old as Japan’s, though it is aging rapidly due to the one-child policy. In approximately ten years, it will mirror Japan’s. Given China’s population of 1.4 billion, immigration cannot reach a scale that would meaningfully shift demographics.
Consequently, both countries are encouraging the population to work longer. While pension reform could help resolve the fiscal challenges of aging demographics, declining populations will impact economic growth.
MACRO VIEWS AND PUBLIC MARKETS
Economic growth in China has slowed in recent years, which, combined with geopolitical tensions and a real estate crisis, has harmed the valuation of Chinese companies. Chinese equities are valued much lower than their comparable peers in the U.S., with a higher dividend yield and lower price-to-earnings ratio. This valuation shows that global investors are hesitant to invest in China, and different accounting standards, lax corporate governance, and the presence of state-owned enterprises may further justify this valuation differential.
There are signs of optimism for Chinese investment markets. Fiscal or monetary stimulus following the U.S. election and growth in advanced manufacturing, healthcare, and other high-value export sectors provide a basis for short- and long-term optimism. GDP growth has steadily risen to approximately 5 percent, which is low compared to China’s in recent decades. Still, it is higher than most major economies globally and may represent a new normal.
CHINA’S GREEN EXPORTS: MARKET DOMINANCE AND RISING CHALLENGES
Because of tariffs and other trade barriers, Chinese electric vehicle and battery manufacturers have sought to build production facilities in the United States and Europe; however, such expansion has proven more complicated than expanding production in China. In addition to multiple levels of federal, state, and local regulation, which create a challenging operating environment and require local knowledge, specialized human capital may be less available in the most regulatory-friendly geographies in the United States. Furthermore, an ecosystem of raw materials and other suppliers has rapidly grown in China but needs to be better established in the United States or Europe, slowing global expansion. Finally, because of geopolitical tensions, Chinese companies are hesitant to make significant capital expenditures in the United States.
It’s also hard to establish manufacturing in the U.S. because all photovoltaic and battery supply chains are in China and cannot be easily moved. Additionally, Chinese companies are hesitant to expend significant capex in the U.S. because of geopolitical concerns and fears of political interference. Policymakers have attempted to ease the global expansion of green technology manufacturing, but efforts have not proven fruitful. When trade negotiators tried to create a list of approved products outside national security concerns, fewer than a dozen low-tech products and services, such as food waste reduction and plastics recycling, were approved.
THE GLOBALIZATION OF CHINESE COMPANIES
Chinese companies are changing their relationship with their Western business partners. While they previously functioned purely as suppliers to large retailers like Walmart, they are gradually building a brand via intermediary platforms like Amazon before establishing their branded commercial operations.
Chinese entrepreneurs are also building “globally native” businesses, drawing on their own international education or commercial experience and with the support of globally oriented investors or other commercial partners. Such models allow these businesses to harvest human capital and Chinese production while gaining better access to global markets.
VENTURE CAPITAL IN CHINA AND THE ROLE OF HONG KONG
The global venture industry entered a downturn in recent years. In China and Hong Kong, the industry peaked in 2021 and has been especially pronounced as geopolitical tensions have amplified the decline in the already challenged venture market. The departure of foreign capital and foreign executives from mainland China and Hong Kong has presented a challenge, and the sluggish Chinese economy and tense political environment may lead Chinese entrepreneurs to form businesses abroad rather than in China. Because of global tensions, IPO markets in the United States may be more complex, especially for high-tech companies.
Chinese venture investors remain optimistic. They consider the current downturn cyclical and expect China’s innovative capacity to persist. Industries such as healthcare remain resistant to geopolitical decoupling, which may create opportunities for Chinese companies across the Global South.
CONSUMPTION AND RETAIL TRENDS IN CHINA
China’s consumer market is rapidly evolving. Competition between Western brands and local competitors is fierce. Western brands have benefited from perceptions of higher quality, product safety, and data privacy. However, even within sectors with many foreign entrants, the success of foreign entrants has diverged as they have adopted different strategies, and some have better aligned with local preferences. Rapid implementation of technology has been the driver of success. In some consumer sectors, such as grocery and media, almost all purchases are made via apps, changing major industries’ economic and competitive landscapes.
China’s retail industry is rapidly digitizing. Online sales, which accounted for less than one percent of grocery sales pre-pandemic, have risen above 30 percent. Beyond disrupting traditional shopping patterns and locations, such digital transformation has enabled 30-minute grocery delivery in most markets, creating a just-in-time grocery model that may upend the entire industry.
China’s total online sales have risen above $2.2 trillion annually, exceeding the volume of online sales in the U.S. This volume is changing industry structures and blurring sector boundaries. Media platforms such as TikTok are increasingly generating revenue as a channel for retail sales, while retailers are building media and influencer partnerships to establish new online sales channels.
THE NEED FOR MORE BLENDED FINANCE IN DEVELOPING ASIA
Southeast Asia merits substantial green investments from both financial and impact perspectives. Eighty percent of the world’s coal power generation is in Southeast Asia, which is both environmentally harmful and will be non-economic over the long term. This blend of impact and financial investment incentives attracts commercial and concessional capital.
Sophisticated institutions create structures that blend multiple commercial and concessional debt and equity capital sources to maximize risk and return. Such structures offer commercial returns to mainstream investors and are also impactful. They draw on various sophisticated capital providers, such as sovereign wealth funds, multilateral development banks, and commercial banks.
These blended commercial structures offer various advantages. They are agile enough to enter markets and non-investable sectors for multilateral institutions. They can also move more quickly, filling gaps left by commercial banks’ retreat from capital raising for large projects.
NEW INVESTMENT THEMES IN SOUTHEAST ASIA
Southeast Asian markets are evolving and have long paths to maturity in several respects. The underdevelopment of capital markets limits exit options for companies. Large economies need to be more cohesive, which slows business scaling. However, market failures create opportunities for disruptive change.
For instance, private equity investment in Southeast Asia’s healthcare sector is gaining momentum, especially post-COVID. Investors are capitalizing on the growth of ambulatory and digital health services, especially in markets like Malaysia and Thailand. These trends, enhanced by digital tools such as telemedicine and AI diagnostics, meet the rising need for accessible healthcare across the region. This shift reflects private capital’s interest in reshaping healthcare delivery for an expanding middle class in Southeast Asia.
INDIA: EVOLVING TRENDS AND INVESTOR VIEWS
Historically, India’s population has had much less access to financial products than those in developed markets. Consequently, mortgage and credit card penetration is growing rapidly, and given India's large population, there is much room for expansion. The economy is also financialized and digitized. India’s banking system is approximately two-thirds state-owned, and this structural inefficiency will create market opportunities for new entrants.
India’s continued growth and unique market characteristics also present opportunities for private market investors. Deeper capital markets are creating more exit opportunities for investors in private companies. Exit opportunities now include strategic investors, IPOs, and the rapidly growing private equity industry. Though poor governance, market fragmentation by region, and a complex political environment have been and continue to be challenges for investors, private market structures are well-suited to address them.
CEO/CIO PERSPECTIVES
Asset owner CEOs and CIOs described a challenging economic and geopolitical environment. Speakers noted that several ongoing megatrends—deglobalization, decarbonization, and digitization—may be deflationary. While China, through efficient production, has been effectively exporting deflation to the rest of the world, this deflationary force may be reduced in the coming years by an expected higher tariff regime.
While much of the roundtable’s discussions focused on geopolitical tensions between the U.S. and China, Asia’s other rapidly growing large economy—India—is not immune from these tensions and is embroiled in an escalating feud with Canada, home to many large global investment institutions.
CEOs and CIOs nonetheless highlighted the importance of not overreacting to geopolitical challenges or resulting policy interventions, such as stimulus. They instead reiterated the importance of remaining focused on the long-term drivers of returns and noted the practical limitation that highly illiquid private markets are difficult to pivot anyway.