Hong Kong maverick Sir David Tang passed away last week at the relatively young age of 63, and the timing of his death seemed peculiarly valedictory for the Hong Kong of old.
That it came barely a fortnight after the former British colony had sent the young leaders of the 2014 street protests to jail – thereby excluding them from participation in Hong Kong politics for the next five years – served to amplify the hollowing out of the “One Country, Two Systems” promise China made prior to the handover from Britain 20 years ago.
Of course David Tang made his name by conjuring an ersatz version of Hong Kong that was part 1920s Shanghai Bund, part English home counties country house. Anyone who has visited the oddly eclectic China Clubs he established in Hong Kong and Singapore in the early 1990s can testify to his signature style.
But nostalgia for an imagined past is still nostalgia, and all the expatriate Hong Kong hands who have worked in the city’s financial industry over the past few decades can be forgiven for pining for the “good old days”, however rose-tinted the memories may be.
The era might have encompassed the shocks of the Asian financial crisis and SARS, but it also featured returns on equity for the big Western investment banks in the 25% area, chunky fee income and streamlined deal execution.
Underwriting syndicates did not contain a cast of thousands – China’s banks are to blame for that development over the past five years – and fees were distributed neatly to a handful of lead managers only too happy to be doing business with their Lan Kwai Fong and Wanchai drinking mates.
All too cosy by half, you might say, and ripe for disruption, but I’m not sure the change which looms for Hong Kong’s financial system is entirely healthy.
THE VARIOUS CONDUITS which have been put in place between the Special Administrative Region and China, such as Stock Connect, which came on-stream in 2014, and Bond Connect, which is barely two months old, seem to me designed to push Hong Kong towards China and to iron out its idiosyncrasies – the qualities the late David Tang espoused.
It’s about Hong Kong becoming more and more like China, the very prospect that drove the 2014 Umbrella Revolution. The process may take a long time to pan out, but its final destination, I suspect, will be the replacement of the Hong Kong dollar with the renminbi, and the eventual unification of the Hong Kong and China capital markets.
Along the way, no doubt, the vestiges of democracy in the Hong Kong political system will wither away, as will the autonomy of the SAR’s courts. We shall see in due course.
It would be a shame, of course for the Hong Kong bond market, which is one of the world’s most liberalised. A rather dull and commoditised venue it might well be, but the low funding rates available for corporates issuing in that market – the benchmark 10-year government bond yield is just inside 1.5%, the lowest in Asia ex-Japan – is an idiosyncratic advantage that will be lost to the SAR’s detriment.
Mind you, while the Dim Sum market for renminbi bonds issued in Hong Kong may have been in terminal decline in recent years, thanks in part to the depreciation of the renminbi, the ability of offshore investors to access China’s onshore market via Bond Connect holds far more promise.
There’s a lot on the horizon in that regard, including the revival of the Panda bond market (Hungary recently revitalised that market with the first sovereign issuance in almost a year) together with structured financings and issuance in Special Drawing Rights, the IMF’s currency basket which includes the renminbi.
ALL THIS ACTIVITY can be seen as a necessary prelude to the eventual internationalisation of the renminbi and its ascent to reserve currency status – something which is firmly on the agenda as far as the Chinese financial authorities are concerned.
And so it won’t be the “two markets, two systems” which is the current status quo between Hong Kong and China but “one market, one system”. That seems inevitable. It’s not the kind of transformation which brings people out on the streets to protest, and you could argue that it anyway only serves to increase the size of the pie available to everyone.
So the old Hong Kong hands – quite a few do indeed remain – get to participate, even if they increasingly play second fiddle to the younger ranks of the Chinese banks’ DCM and syndicate teams.
And with the cross-sell between balance sheet lending in the syndicated loan market and bond mandate grabbing immovably in place, it’s no surprise that the Chinese banks are moving towards eventual league table hegemony in the Asian primary bond markets.
All this might require an old Hong Kong hand to dust off his Shanghai Tang Mao jacket, find a quiet corner in a bar on Lan Kwai Fong and raise a glass to Sir David. They don’t make his like anymore. As with much of the transformation under way in Hong Kong, that seems rather a shame.
