International companies began trickling out of Hong Kong a few years back, uneasy about the financial hub’s tightening ties to mainland China. That first smattering of departures is now turning into a broad retreat involving banks, investment firms and technology companies.
The number of U.S. companies operating in the city has fallen for four years in a row, by Hong Kong’s count, hitting 1,258 in June 2022, the fewest since 2004. Last year, mainland Chinese companies with regional headquarters in Hong Kong outnumbered American ones for the first time in at least three decades.
Coming to Hong Kong used to be “a fairly risk-free matter,” said Simon Cartledge, who runs a research and publishing company in the city and is the author of “A System Apart: Hong Kong’s Political Economy from 1997 until Now.” “Now, it’s not a risk-free place. There are question marks over everything.”
For years after the U.K. returned Hong Kong to China in 1997, Hong Kong appealed to foreign companies by being close to China—but not too close, thanks to a separate legal system, independent judiciary and commitment to Western-style freedoms.
That calculus has shifted in response to Hong Kong’s tighter national-security restrictions, Beijing’s crackdown on foreign businesses, an economic slowdown in the mainland and growing tension between the U.S. and China. Some foreign executives say the lines between Hong Kong and mainland China have become blurred.
“Hong Kong is now seen as an extension of China,” said Rob Jesudason, founder of Serendipity Capital, which invests in technology companies around the world. He moved from Hong Kong to Singapore in 2019 to set up the company.
Few multinational companies have an interest in abandoning their operations in China, still an important market. But more of them are either choosing to be in mainland China or setting up their Asian hubs in Singapore, long Hong Kong’s rival as the region’s financial and business center.
In a written statement, a spokesperson for the Hong Kong government said that Hong Kong “remains one of the most business-friendly places in the world” and is “home to around 9,000 mainland and overseas companies.” That number, combining Chinese and foreign businesses, the spokesperson said, has remained stable over the past five years.
The roster of departing companies, however, is growing. Australian bank Westpac left, and National Australia Bank is planning to follow suit. Three U.S. and British due-diligence companies are moving employees out of the city, The Wall Street Journal reported earlier this month. The Ontario Teachers’ Pension Plan, one of Canada’s biggest pension funds, shut down a stock-picking team based in the city. TTM Technologies, a California-based manufacturer of printed circuit boards, moved out.
Canadian pension-fund manager Alberta Investment Management Corp., U.S. tech company Vantage Data Centres and the Cayman Islands government all considered setting up regional bases in Hong Kong before choosing Singapore instead. Shipping giant FedEx is moving some regional jobs from Hong Kong to Singapore, while U.S. office-furniture maker Steelcase has already moved regional executives there.
Foreign investors are pulling out of Hong Kong’s stock market, where many of China’s biggest companies are listed. Hong Kong’s benchmark Hang Seng Index was down more than 13% this year at Monday’s close, a contrast to bull markets in the U.S., Japan and elsewhere. The city’s property market is in a slump.
Beijing’s tough treatment of foreign companies this year, and its use of exit bans targeting bankers and executives, has unnerved multinational businesses.
On Saturday, Shanghai police detained one current and two former employees of GroupM, a unit of London-based advertising giant WPP, citing suspicions that they accepted bribes. WPP subsequently said it terminated the detained executive and is conducting its own investigation into the matter.
Earlier this year, authorities in mainland China raided the offices of due-diligence company Mintz Group and expert-network consulting firm Capvision, and questioned the staff of consulting firm Bain. China fined Mintz for allegedly conducting unapproved statistical investigations, and accused Capvision for carrying out activities that ran counter to national security.
Those actions raised concerns about what types of business due-diligence China would consider sensitive, unlawful or tantamount to espionage. Earlier this month, Capvision said it had completed a “rectification” supervised by the Chinese government. Mintz didn’t respond to requests for comment.
Some business travelers to Hong Kong are now bringing “burner” devices, smartphones or laptops wiped of data or apps, said Katherine Mansted, executive director of cyberintelligence at Australia-based cybersecurity firm CyberCX. While business travelers to mainland China have long used such devices, Hong Kong had been seen as a much safer place.
It is difficult for Hong Kong’s government to improve its reputation without appearing disloyal to China, said Kurt Tong, former U.S. consul general in Hong Kong and now a managing partner of business advisory firm the Asia Group. “The problem is they can’t use the talking points that would be most effective, which would be saying: ‘We’re different from China, we’re better than China,’ ” he said.
Tensions between China and the U.S. have made it harder for American multinational companies to persuade valued employees to move to Hong Kong, said Alice Au, who co-heads executive-search firm Spencer Stuart’s board and CEO practice in Asia.
“It’s not as sexy as before, because now there seems like a lot of risk,” she explained. “And now that China isn’t in such high growth anymore, it’s less of a plum assignment. This is a shame as there is less of a chance to promote understanding.”
Broadcast-technology company Caton Technology moved its headquarters from Hong Kong to Singapore last year. Chief Executive Officer Ray Huang said that because Caton has a major American investor and does business with companies in Japan, Taiwan and the West, being “a Singapore company is more neutral to everyone.”
TTM Technologies, the American circuit-board manufacturer that left Hong Kong this year, has said its customers wanted equipment made outside China. It is opening a factory in Malaysia.
Even some companies that cater to Chinese clients have reconsidered Hong Kong. Westpac has left the city and National Australia Bank is set to follow, but they are keeping staff in mainland China.
Hong Kong’s government followed the lead of mainland China in pursuing strict measures to contain Covid. Although the restrictions weren’t as onerous as on the mainland, they prompted some companies and people to leave. While some people have returned, companies have been more reluctant to reverse costly relocations.
Western executives who have chosen Singapore over Hong Kong describe the city-state as a better place to base their Asian operations. “Hong Kong would have been very much about China,” said Evan Siddall, chief executive officer of Alberta Investment Management, which set up in Singapore this year to invest more in the region. “We needed an Asia hub, and Singapore made more sense for us.”
Denver-based Vantage Data Centers considered making Hong Kong its regional base, but it, too, opted for Singapore. Jeff Tench, its executive vice president in North America and Asia Pacific, said many of its customers, including large cloud-service providers, also had regional centers there.
Hong Kong still offers many attractions for Western companies, including low taxes, a well-developed financial market and a world-class infrastructure. Hong Kong Chief Executive John Lee has promised closer links with Southeast Asia, and welcomed Thailand’s prime minister for a three-day visit in early October.
Hong Kong appears well positioned to benefit from growing ties between China and the Middle East. Dubai Chambers, a government organization that supports businesses, opened an office in Hong Kong this year to encourage tie-ups between the two markets.
Although information still flows more freely in Hong Kong than in mainland China, a series of moves by the government have raised concerns at Western companies.
In 2020, in the wake of widespread antigovernment protests in Hong Kong, Beijing imposed a national-security law there that gave it broad powers to punish dissent. In response, the U.S. government sanctioned several politicians in the city for “undermining Hong Kong’s autonomy.” They included Lee, then Hong Kong’s secretary for security and now its chief executive.
This year, Hong Kong’s government has tried to expunge from YouTube a song that had become an anthem for the protest movement, creating tension with Google, which owns the platform. A Hong Kong judge rejected the government’s attempt, but the government has appealed, arguing the judge should have given more deference to the views of the city’s leader.
The American Chamber of Commerce in Hong Kong said in July it had expressed concerns to the government about the negative implications a move to ban the song could have for the city’s business sector. A Chamber spokeswoman said its members thought the move could damage how foreign investors view the city’s business environment.
Chamber representatives traveled to Washington in July to brief U.S. government officials on American companies operating in Hong Kong. In a subsequent report to its members about the trip, the Chamber said some members of Congress agreed that the U.S. needed to continue its relationship with China and its companies, but that politicians increasingly “distrust the private sector doing business in China.”
“We found a low awareness of Hong Kong and its nuanced relationship with mainland China at best, and at worst a general tendency to view it as indistinct from China,” said the report, which was reviewed by The Wall Street Journal. The chamber said there is little interest or ability to differentiate the city from the mainland, citing as an example President Biden’s executive order on U.S. outbound investment that listed Hong Kong alongside mainland China as a “country of concern.”
The Hong Kong government spokesperson said the city operates under the principles of “one country, two systems,” a model adopted following the handover from British control that gives Hong Kong a great deal of autonomy from mainland China. “Hong Kong remains the only place in the world where the global advantages and the China advantages converge in a single city,” the spokesperson said.
Gregory May, the U.S. consul general in Hong Kong, said at a conference in August that one of his priorities is to build connections between the U.S. and Hong Kong through cultural and academic exchanges, in an effort to steady U.S.-China relations during complex times.
Hong Kong is still an obvious place for global investment banks to set up shop, partly because opportunities from mainland China dwarf those from other Asian countries. But those opportunities are shrinking.
Hong Kong initial public offering volumes declined to $13.4 billion last year, down more than two-thirds from 2021, according to Dealogic. Volumes so far this year are even lower, reaching just $3.5 billion by Oct. 18. Banks including Goldman Sachs and Morgan Stanley have cut jobs in the city.
Assets under management for Hong Kong’s private banks and wealth manages declined 15% in 2022 from the previous year, while net fund inflows dropped about 80%, according to a survey published this month by the Private Wealth Management Association and KPMG China.
“Hong Kong is stuck,” said Cartledge, the author and publisher, citing the city’s economic stagnation.
The city, he said, “still has a capacity to surprise. There are still great people here, and that’s what might let the vitality of this place be rediscovered.”
Source: The Wall Street Journal October 24, 2023 | By Elaine Yu