Hong Kong’s unique advantage of “one country, two currencies” will remain as long as a fully convertible RMB remains in the works, said Credit Suisse APAC CIO John Woods at Asian Private Banker’s Asian Outlook 2022 seminar.
Over the past decade, China has been setting up onshore free trade zones and accelerating its policy to open up its financial market by building multiple Greater Bay Area (GBA) cross-boundary investment channels, including the Stock Connect, Bond Connect and, most recently, Wealth Management Connect schemes.
“They [the Chinese authorities] are 100% deadly serious about promoting these centres around the country as financing hubs, as technology hubs. The country is vast, and easily has the critical mass to host this type of infrastructure,” said Woods.
“Hong Kong clearly benefits from ‘one country, two currencies’ — the opportunity for investors both to raise capital and to invest here. For me, that’s of critical importance and I don’t see China changing it anytime.”
Woods added that people over the past 20 years have been asking the question “When will the RMB become convertible?”. The answer across the decades has consistently been “in five years’ time”. The perpetual wait obviously affects mainland Chinese companies trying to raise or recycle liquidity, as well as investors seeking to get into the mainland China market and invest in hard currency. So long as the control of the RMB conversion and capital flow remains in place, Hong Kong would remain irreplaceable as the financial hub with an independent currency, Woods asserted.
“My sense is that Hong Kong is bullet-proof. Absolutely bullet-proof until the RMB becomes a fully and freely convertible international currency. And at that point, it becomes somewhat fungible with Shanghai or Beijing, because we will either be operating in RMB or be pegged to the currency,” said Woods. “We are very much ‘one country’ these days, but Hong Kong is utterly unique, right across China, in having its own currency.”
Moving towards an open economy
On the point of constantly waiting for the further opening up of the onshore market, Harmen Overdijk, global CIO and co-founder at Leo Wealth, added that if China has to become an economic superpower, it needs a “truly open economy” with a “fully opened capital market”.
However, the announced policies on opening up the onshore capital market are moving slower than expected and in view of the regulatory shake-up — that he expected to continue for some time — he thought the Chinese authority’s focus in the next five years would be on developing its domestic capital markets.
“In a way, I’m disappointed because the GBA initiative was announced seven years ago, and it is moving only very, very slowly. It’s unclear what the short-term impact of this initiative will be. But the longer-term significance is clear, meaning that China is willing and is moving towards an open economy,” said Overdijk.
In response to that frustration, Eleven Ying, global market head and Singapore CEO, Heritvest Global, pointed out that Chinese asset managers are here to help navigate existing cross-boundary investment channels for foreign players.
“I heard from Harmen — and have learnt from a lot of foreign investors — that they are keen on investing in China, but face unclarity and difficulties in cross-boundary investment and financing channels. Many preferential policies and cross-channels have been established in China — such as the QDII and QFII — and there are special policy arrangements in different areas. This is our expertise: we have built up a platform at Heritvest surrounding these policies to help banks service clients.”
Regulatory shakeup isn’t over
Looking at the 2022 regulatory landscape, all panel participants expected reforms to continue, with Woods being slightly more optimistic, and expecting greater clarity after the “Two Sessions” of the National People’s Congress and the Chinese People’s Political Consultative Conference in the spring of 2022.
While a number of major banks over the past few weeks have been calling for overweight in China equity, Woods emphasised that Credit Suisse is neutral.
Overdijk agreed that the regulatory shake-up is not over yet and held that it was unlikely that the regulatory landscape would be settled by 1Q23 after the Two Sessions, because the “common prosperity” drive has been described as a decades-long project. Both Overdijk and Ying recommended that investors look for opportunities aligned with the policy agenda.
“For example, you could focus on policy-supported sectors — such as renewables, ESG related sectors and mass healthcare sectors — or sectors which are critical to China’s self-sufficiency,” Overdijk offered.
“The focus on common prosperity is proving to be immensely profitable as an investment thesis. Our sustainable China theme is up 70% year to date,” he added. “Clearly, clients are benefiting from this by joining policymakers and investing alongside their initiatives.”