What next for Hong Kong?

“Even in a city known for its frenetic pace, the change since Britain handed back Hong Kong to China 20 years ago has been remarkable,” says Daniel Shane in Barron’s. These days you are just as likely to hear Mandarin, the Middle Kingdom’s national language, as Cantonese, the local one. This is symptomatic of the territory’s gradual loss of status and influence in the Chinese context.

In 2003, notes Yue Wang in Forbes, Hong Kong had the world’s busiest container port. Now it ranks fifth. Hong Kong comprised a fifth of China’s GDP in 1997;  now just 3%. The local stockmarket, moreover, has been eclipsed by Shanghai.

At the handover, most of the stocks were trading houses or big players with British links, such as HSBC. Now more than half the benchmark Hang Seng index is made up of mainland companies, which have been keen to list and raise international capital in an area with a free market and a legal system based on British common law. This niche as a secure gateway to China now appears to be under threat. China is slowly beginning to open its own markets to foreign money. It is planning to make the currency convertible, while in the past two years it has introduced the Stock Connect system, whereby overseas investors can access domestic A-shares listed in Shenzhen and Shanghai if they invest through Hong Kong. There will soon be an equivalent for bonds. While this gives Hong Kong more business, it will gradually lose its lustre as foreigners’ exclusive gateway to China.

So what next? The answer, as Lisa Jucca says on Breakingviews.com, is to attract “more and better mainland companies”. This would burnish its credentials as Chinese companies’ gateway to the world. The problem here lies mainly in corporate governance. The city “cannot alone effectively police rogue mainland firms”.

Fifty stocks are currently suspended amid accounting irregularities, investigations or a lack of detailed figures. Sudden huge slides in small-cap stock prices are common, a result of thin turnover, small public floats and a wheeze known as shell farming. Companies list in order to be taken over by a mainland group, thereby allowing the latter to evade the scrutiny that comes with an official flotation.

The speculation over a bid for these tiny firms sends them soaring – and then they fall back to earth when no deal appears. Hong Kong is losing its old role, but has a long way to go before it cements another. It is still “caught between two worlds”.