The Hong Kong economy is changing from one in which the mainland needs Hong Kong to one in which Hong Kong needs the mainland. With the relationship between the U.S. and China unlikely to improve and the Chinese Communist Party’s (CCP) economy lacking in performance, the southbound capital vital to Hong Kong stocks may be reduced to nothing more than a trickle, and there is no way to tell how long Wall Street’s investment in China will continue. Given this situation, who can “support” the Hong Kong economy?

The government’s fiscal deficit for 2020/21 has soared to a record high. In the section of “Positioning and Directions for Economic Development” of this year’s Budget, the first sentence of the strategy is “Hong Kong has been leveraging the support from the Mainland...” In recent years, Hong Kong has been increasingly subject to Beijing’s control, however, the more the SAR authorities “leverage the support from the mainland” politically, the greater the public discontent. Economically, Hong Kong’s foreign trade is shrinking and the securities industry, the mainstay of the economy, is changing from one in which the mainland was dependent on Hong Kong to the other way around. The “support” that the Hong Kong government was referring to has become “dependence.”

Before the handover, Chinese stocks accounted for about 10% of the total market capitalization of the Hong Kong stock exchange, but this ratio jumped to 60% more than a decade ago. It can be said that the Hong Kong securities market had already been mainlandized since then. The Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect were launched several years ago, and until February 27 this year, the southbound leg traded HK$2,831.8 billion (US$365 billion), while the northbound traded HK$2,123.6 billion. The difference of HK$700 billion has created a “blood transfusion” of mainland capital into the Hong Kong securities market. This “blood transfusion” was particularly intense in the past year as southbound capital (HK$1,232 billion) exceeded northbound capital (HK$717.7 billion) by HK$500 billion.

Of course, southbound capital includes not only mainland capital but also Hong Kong and foreign capital leaving the mainland, which should be separately classified. According to information obtained by the author, since the introduction of the Stock Connect, net mainland capital inflow into Hong Kong accumulated to HK$249.3 billion by the end of 2019. During the same period, all southbound capital including Hong Kong and foreign capital was more than northbound capital, with a net inflow of HK$200 billion into Hong Kong. Compared with the net southbound inflow of mainland capital, Hong Kong capital and foreign capital are net outflows from Hong Kong up north to make riches. That is to say, the rally of Hong Kong’s Hang Seng Index relies heavily on mainland capital. Looking at the movement of northbound capital in the past year, most of the foreign capital went north to make long-term investments in A-shares. Therefore, it can be roughly concluded that the HK$500 billion net inflow of southbound capital in the past year is basically mainland capital, which is an obvious source of support for the Hong Kong stock market, with about 15% of the total turnover of the Hong Kong stock market last year being contributed by mainland capital.

This year, Beijing has started to tighten the budget, which indicates that there may be a relative contraction of southbound capital in the future, and this will put pressure on Hong Kong stocks that rely on southbound capital. This situation illustrates the dilemma of reliance on mainland capital in Hong Kong’s financial sector. The bigger problem is that Hong Kong stocks’ reliance on southbound capital will eventually be impacted by changes in the circumstances of the Beijing authorities themselves.

Economically, the CCP must also rely on stolen technology and intellectual property, on the money it makes through Wall Street, and on selling the imagined economic success of China to attract U.S. capital. Most of the foreign capital going north from Hong Kong originates from the U.S. Therefore, when Hong Kong “leverages support from the mainland,” it was actually hoping that Beijing will “leverage support from the U.S.” Earlier this year, Beijing was under the illusion that it could completely overturn Trump’s China policy, and thereby be able to rely on Biden to restore its economic “support from the U.S.” However, it seems that Beijing’s hopes are now dashed.

As the CCP’s military threat to the U.S. continues to grow, the two countries are locked in a cold war situation militarily. At the request of the U.S. military, Biden set up a Department of Defense China Task Force. The head of U.S. Strategic Command (STRATCOM) also declared, “We are not in a Cold War, but a threat much more serious than the Cold War.” Under these circumstances, it is very difficult to fully revive the relationship between China and the U.S. The New York Stock Exchange (NYSE) on February 26 began to delist Chinese state oil giant CNOOC Ltd. Wall Street’s limited investment in China is likely to become less and less in the future.

If Beijing is unable to “leverage support from the U.S.,” Hong Kong stocks can hardly “leverage support from Wall Street.” The Sino-U.S. relationship is now unfavorable for the CCP, so can Beijing get out of this mess? How long can Wall Street continue to “support” Hong Kong stocks? Wall Street does not know, the Hong Kong SAR authorities naturally do not know, and its “support” Beijing knows even less.

(Cheng Xiaonong, visiting scholar in the United States)

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