The trade war may reverse Hong Kong’s commercial decline
AS DONALD TRUMP’S tariff tantrum destroyed trillions of dollars in shareholder value, shrieks of horror from American chief executives grew high-pitched. If you think America Inc had it bad, then spare a thought for Hong Kong. The self-governing Chinese territory is the world’s gateway to Asia, and China in particular. It is also Asia’s, and China’s, gateway to the world. And for the trade-warmonger-in-chief, China and Asia are enemies number one and two.
In the week after “Liberation Day” on April 2nd, the Hang Seng index of Hong Kong-listed shares fell by 13%. April 7th was its worst day since the Asian financial crisis of 1997. Despite a subsequent 90-day pause to most of Mr Trump’s “reciprocal” tariffs and a temporary exemption for some electronics, a tit-for-tat with China has ended (for now) with mutual levies in excess of 100% on most goods, plus a Chinese ban on exports of some critical minerals for good measure. This amounts to a trade embargo which prises apart the world’s two largest economies.
You would expect their historical go-between to be freaked out by all this. Yet throughout the turmoil, Hong Kong’s business elites have displayed a surreal calm. Some could simply be frozen in stupor. Some may be shrieking at ultrasonic frequencies and so be inaudible. But many seem to believe that Hong Kong can withstand the trade shock. And a few reckon that after years of losing ground to rival commercial centres in the region and beyond, the realignment of global business gives it a shot at clawing some of this back. It is not just a trauma-induced hallucination.
Hong Kong has had a rough few years. Before the outbreak of covid-19 it was upstaged by Shenzhen, Shanghai and, for the most ambitious Chinese firms, New York as the place to go public and plot global expansion. Between 2010 and 2019 mainland bourses added 2,100 listings, over two and a half times the increase in the 2000s. A little over 700 Chinese businesses picked Hong Kong, not much better than the 450 or so in the preceding decade.
During the pandemic, city authorities made things worse, first by mishandling the response with harsh lockdowns, then by enforcing a draconian national-security law which made outsiders feel unwelcome. In both cases they became “extremely overcompliant” with edicts from Beijing, recalls a Western banker.
Nineteen global law firms had closed their Hong Kong practices by 2023. FedEx opted to ship its regional headquarters to expat-friendlier Singapore. So did other multinationals, from L’Oréal, a French maker of posh cosmetics, to Lidl, a German cut-price retailer. LVMH started running its luxury labels from the mainland.
Hong Kong’s capital markets hit snooze. Companies sold new shares worth a combined $40bn in 2022 and 2023, down from more than $200bn in the two previous years, according to data from Dealogic, which tracks such things. Offerings declined in mainland China, too, but only from $288bn to $234bn. Bond sales in Hong Kong followed a similar pattern. Investment banks shifted some staff to Singapore. A couple of Australian lenders, Westpac and National Australia Bank, moved out altogether.
All rather unpropitious—until Mr Trump stepped in. Since he won the election in November Hong Kong’s prospects have brightened relative to its challengers’ in direct proportion to the intensity of his China-bashing. The entrepot now looks like the only place for Chinese companies to gaze abroad and for foreigners to get a look-in on unmissable pockets of Chinese growth.
Start with Chinese businesses. Shanghai is great if your focus is the domestic market. But as China’s economy slows, many spy future profits overseas. To do that they need dollars (or other hard currency) and international expertise. They will not find them on the mainland, surrounded by a perimeter of capital controls and growingly hostility towards foreign advisers. Mr Trump’s anti-Chinese antics are putting a target on the back of American lawyers and consultants, many of whom were packing up as it is.
Singapore has the worldly know-how but its financial markets remain too shallow. And under Mr Trump Chinese companies might as well forget about New York. Chagee, a Shanghainese teashop chain which on April 10th inexplicably chose to launch an initial public offering on the Nasdaq exchange despite the market chaos, may be the last Chinese firm to try for some time.
That leaves Hong Kong. In March BYD, a Chinese firm bent on world domination in electric vehicles, and Xiaomi, a phonemaker with a growing sideline in EVs, sold nearly $6bn-worth of shares apiece in follow-on offerings. These were the biggest of their kind on the city’s stock exchange since 2021. All told, this year companies have raised $15bn in such sales plus $26bn in dollar debt—not far off the total in all of 2024 and nearly twice as much as in the entire year before. Initial public offerings have picked up, too. Many bankers are making the return trip from Singapore. The number of foreign law firms is up to 84, from a covid-era low of 73.
When red is green
All this excitement has not been lost on Western investors. In the words of a finance bigwig, China was uninvestible only until its dormant stockmarkets surged. Artificial-intelligence darlings like DeepSeek are bolstering confidence in Chinese ingenuity. The trade war is pushing President Xi Jinping to discard his aversion to economic stimulus, which may prop up other firms. For foreigners fearful of missing out but fretting about repatriating returns from the mainland, Hong Kong is a way to get a piece of the action. The Hang Seng is 9% higher than at the start of the year. Its tech sub-index is up by 15%.
It could all still go horribly wrong. As Mr Xi warned Mr Trump on April 14th, the trade war will have “no winner”. But it may help Hong Kong notch up a few points against its entrepot rivals. ■
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