With Hong Kong protests turning increasingly violent, Chinese media have been calling for stricter actions against the demonstrations. However, Beijing has largely limited itself to issuing warnings rather than taking concrete military action against the city. This is because Hong Kong continues to be a very significant financial asset for China.
The biggest Chinese companies use Hong Kong’s stock market to raise capital, whether it be private firms like Tencent or state-owned corporations like the Industrial and Commercial Bank of China. In 2018: “Chinese companies raised US$64.2 billion globally — almost a third of the worldwide total — via initial public offerings (IPOs), but just US$19.7 billion of that came from listings in Shanghai or Shenzhen… compared with US$35 billion in Hong Kong,” according to Reuters.
Almost 33 percent of the debt raised by Chinese companies last year was through Hong Kong. Foreign investors buy mainland stocks through the “Connect” schemes that the Hong Kong Stock Exchange (HKSE) runs with the Shanghai and Shenzhen stock exchanges. Any harm to Hong Kong will end up blocking the fundraising capacities of Chinese firms.
Chinese banks have huge exposure to Hong Kong. Between 2010 and 2018, the total assets owned by mainland financial institutions in Hong Kong grew by 3.2 times to about US$1.2 trillion. This comes to almost 9 percent of China’s GDP.
“While Hong Kong’s bank assets have grown very fast in an aggregate term, China has outpaced all the other countries as their share of assets in Hong Kong’s banking sector increased from 22 percent in 2010 to 37 percent in 2018… The surge draws deep contrast to European banks, which have barely increased their exposure in Hong Kong, and the much slower pace of Japanese and American players,” according to Bruegel.
The huge stake of Chinese banks in Hong Kong means that mainland financial institutions stand to lose a lot more than lenders from other regions should the situation in Hong Kong get out of control. The hit to the banking sector will spill over into China and could trigger a credit crisis on the mainland, which is something that Beijing definitely does not want to happen.
Hong Kong is also an important tool for China’s renminbi internationalization ambitions. It was in 2004 that Hong Kong became the first offshore market in the world to offer complete renminbi banking solutions. Beijing’s BRI project is expected to boost the renminbi’s status as a cross-border settlement currency. However, if Hong Kong were to lose its international financial status, this would have adverse effects on the future growth of the renminbi.
“Hong Kong’s renminbi liquidity pool (a combination of renminbi deposits and renminbi certificates of deposit), the largest outside mainland China, reached RMB634 billion (US$92 billion) at the end of June 2018… The People’s Bank of China has issued renminbi-denominated central bank bills in Hong Kong through HKMA’s Central Moneymarkets Unit (CMU) four times — totaling RMB90 billion (US$13 billion) — since November 2018 to adjust liquidity and stabilize exchange rates in the offshore renminbi market,” according to PIIE.
In addition to the above, Hong Kong is the mainland’s biggest trading partner in services, accounting for more than 20 percent of the market. This is higher than America’s service market share of 17 percent. Plus, Hong Kong also controls a significant portion of China’s exports and imports.