The 1st of July 2022 marks the 25th anniversary of Hong Kong’s handover as a former British colony to mainland China. The incoming chief executive has his work cut out for him to reinvigorate the city’s status as a global financial hub.

At the end of today, current Hong Kong chief executive Carrie Lam and her administration will end a five-year term that marked perhaps the most tumultuous period for the city since the British handover in 1997. 

She will be succeeded by incoming chief John Lee who will address a myriad of issues with a Beijing office having issued a wish list of goals that range from taming high housing prices to greater integration with mainland China. Of note for the financial sector is the directive to «consolidate and improve» Hong Kong’s competitiveness as a global hub.

Uphill Battle

Lee, 64, inherits the leadership position in a city battered by various challenges linked to the Covid pandemic, civil unrest as well as geopolitical tensions in the past three years. 

The anti-government movement in 2019 and 2020 marked a new era for Hong Kong after a highly unpopular extradition bill, which was eventually withdrawn, triggered mass protests that led to citywide unrest. In addition to sparking the first wave of departures from both local and expat residents, this would culminate in the unprecedented issuance of US sanctions against Hong Kong officials and the enactment of the controversial national security law.

This was followed up by a pandemic and Hong Kong’s strict zero-Covid policy, in line with the mainland, which further drove away talent. The business community was equally concerned with companies from various industries relocating top executives and drawing up contingency plans.

Wealth Hurdles

Hong Kong-based private banks have been one of the most challenged financial players during this turbulent period. 

Starting in 2019, there were already signs that a growing number of clients traditionally oriented around the Greater China region were seeking alternatives elsewhere, especially amongst ultra-high net worth individuals and family offices. J.P. Morgan Private Bank, for example, established China coverage out of Singapore in the same year to capture wealth linked to Chinese corporates setting up their international headquarter in the city-state. In late 2020, it announced it would further double the size of the team over a two-year period. 

And even for wealthy individuals that are open to booking in Hong Kong, the strict Covid restrictions have hit private banks’ ability to acquire new clients and assets with quarantine rules, for example, limiting business travel.

«Client acquisition has been tough. As a team, we seldom travel due to all the restrictions,» a senior private banker covering the North Asia markets told finews.asia on the condition of anonymity. «I have to say, our ability to go out to introduce ourselves to prospects has been very much affected in the last two years, especially in Hong Kong. Honestly, almost all the new clients we’ve acquired were from referrals either from existing clients or partners like law firms or trustees.» 

Trading and IPO Slump

The zero-Covid policy has also contributed to weaker markets in Hong Kong and China with private banks experiencing the effects of dented investor sentiments. In fact, the region’s top 10 private banks saw the rare occurrence of lower assets under management, according to finews.asia’s 2021 AUM League Table – down 1.6 percent year-on-year – driven by mass de-risking. Hong Kong was particularly affected not only by lower client acquisition but also because it is well known for its base of active trading clients.

The impact of weaker markets extends to investment banks in Hong Kong which have been undergoing increasing turnover with exits at the likes of Credit Suisse and Deutsche Bank, as reported by finews.asia. As of end-May, Hong Kong’s main board raised around HK$17 billion ($2.2 billion) from IPOs – down 91 percent year-on-year – according to data from the city’s exchange. A recent PwC estimate forecasts that Hong Kong could rebound in the second half and generate HK$331.7 billion from 99 deals for the full year, marking a 40 percent annual decrease.  

No Certainty

Despite the plethora of challenges to address, Hong Kong’s fate is far from certain.

In the short term, it could experience a material rebound from the loosening of Covid-linked curbs. The Lee administration’s incoming health minister Lo Chung-mau told «SCMP» that the government was weighing options for a reopening, including the possibility of easing quarantine for travelers from seven days in a hotel to five days plus two days of home quarantine.  

And in the long-term, history has proven that what may appear to be an obvious and popular prediction today may not necessarily materialize in the future. 

«There’s a question to be made about global financial centers. Are they shifting around when they are vying for money, talent and companies? Will we see a resurgence in Hong Kong’s fortunes as it reopens or, over time, will it continue to decline in the rankings?» asked Julius Baer’s APAC head of research Mark Matthews in a recent webinar.

«I don’t know. But I do know that today’s certainties are often tomorrow’s historic curiosities. For example, 1.2 square kilometers of the Imperial Palace in Tokyo in the 1980s was worth more than the entire state of California. We recognize, in retrospect, that this was tremendously overvalued.»