Why You Should Care About Hong Kong's Future

Asia is changing - as is the way that investors access the growing markets in the region. As China forges stronger relationships with the West, what is the role of Hong Kong?

Emma Wall 27 January, 2016 | 8:28AM
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Emma Wall: Hello and welcome to the Morningstar Series 'Ask the Expert'. I'm Emma Wall and I'm joined today by Edward Smith, Asset Allocation Strategist for Rathbone.

Hi Edward.

Edward Smith: Hey.

Wall: So we've had a lot of news this week about the Hong Kong currency, what's the latest?

Smith: Well it's very interesting for the first time since the Asian financial crisis in the late 1990s. Currency traders are speculating that the Hong Kong dollar may have to come off the dollar peg or at least adjust the peg. Now that’s a pretty major developments being very stable for almost 20 years now. Now we are seeing this speculation that relationship might have to come to an end.

Wall: What does that mean for the future of the Hong Kong dollar?

Smith: Well, we think that speculation is rather overdone. The Hong Kong Monetary Authority, who control the exchange rate regime they are adamant that the U.S. dollar peg remains right for them. Economists at the IMF backed them up this week in their latest report. We went and saw the Hong Kong Monetary Authority back in October. And for what it's worth we agree with them as well. I think there are two things firstly, Hong Kong is important as a center of intermediation, intermediates financial flows between the West and China.

Intermediates trade servicing and shipping and all of that means that their clients don’t want them to introduce yet another currency to add to their headache of hedging an asset liability management or all of that. So we don’t think it would ever go free floating. Now should it become pegs to the Chinese RMB at some stage that’s a more interesting question. At the moment it appears that the U.S. and the Western business cycle still is the dominant force on the Hong Kong business cycle. So at the moment it's still appropriate to be pegged to the dollar.

Wall: I mean this raises questions about the future of Hong Kong in general, doesn’t it. I mean you've mentioned that all the reasons, why Hong Kong is important internationally. But those reasons of course with technology, with the advancement of China's attitude towards doing more business globally. Things like the Hong Kong Shanghai Connect.

There is rumours in China that that is just the first of many connects of the Shanghai composite with more liquid, more developed markets. If China builds those bridges outside of Asia. It does call in to question, the future of Hong Kong and what Hong Kong will represent.

Smith: Absolutely right, and I am sure lots of people in London and the British Government would love London to become a center of RMB and Chinese stock market trading like Hong Kong. I think what's important for Hong Kong is that they really knuckle down and insert themselves as the go to administrative hub in the Asian region. Not just for flows into China, but flows anywhere in Asia.

If they become the trustworthy, credible center with a legal system that everyone understands than they should be able to still play an important role. Even if China does start to take on a lot of that overseas investment intermediation itself. Cut out the middle man, just if you want to be in China, go direct to China and think that will happen. But we've got a long way to go before we get there.

China is only just starting to open up its capital accounts. My assessment is that Beijing still wants its hands firmly on the levers of the economy. And I think that’s going to mean a very controlled number of external relationships. I think it's still in their interest to finally let through Hong Kong. But longer term it may be difficult if Hong Kong doesn’t assert itself as that sort of trustworthy center.

Wall: Edward thank you very much.

Smith: Pleasure.

Wall: This is Emma Wall from Morningstar. Thank you for watching. 

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Emma Wall  is former Senior International Editor for Morningstar

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