Will Hong Kong Win the Battle to Become the Gateway to Asia?

Will Hong Kong Win the Battle to Become the Gateway to Asia?

February 24th, 2020 - Financial, Global Connectivity

By Jeff Mezger, Director of Product Management, TNS

The dynamic markets of Asia have long held appeal for Western traders but knowing where to put a stake in the ground has been challenging with several emerging countries jockeying for position.

China is the biggest equity market in Asia with a market capitalization of more than USD $7 trillion, but as a closed market has not been available to foreign firms. This has led to Japan and Hong Kong developing as the main challengers both with similar market capitalizations of over USD $5 trillion and Singapore nipping at their heels.

This dance is one that could continue for many years to come, except for some recent significant developments by the Chinese that appear to be shaping and cementing Hong Kong’s position as the main gateway to Asia.

What has changed?

The Chinese government is keen to attract global investors which meet its criteria and recognizes that it cannot remain a fully closed market to do this. Hong Kong is a logical asset for it to utilize to open the door slowly to approved financial market participants and it has taken the following strategic steps:

  • Updated listing rules for Hong Kong Exchanges and Clearing (HKEX) – these rules, which are now more similar to other global exchanges, have facilitated many technology company IPOs and Hong Kong subsequently added USD $937 billion of market value between April 2018 – March 2019.
  • Opened through train connection from HKEX to Shanghai and Shenzhen – approved foreign firms wishing to trade on the Chinese exchanges or do business in China can now do so via this mechanism. The point of entry within Hong Kong can be easily reached with a TNS connection to HKEX.
  • Removal of trade restrictions – to encourage trade on Chinese stock exchanges, Chinese regulators have removed restrictions on areas like volume.

In addition, HKEX shared its three-year plan in February 2019 which included the desire to diversify into derivatives and expand the London Metal Exchange to trade during the Asian time zone.

Is this enough to unseat Japan?

Japan remains true to its rich cultural heritage and has many rules that it requires foreign investors to follow, which do not exist in other countries. This creates significant complexity although it is not insurmountable. For those organizations wishing to reach this market I recommend they access the Japanese exchanges via a connection with TNS. We have a local team in-country that can provide language and cultural assistance, as well as identify the lowest latency infrastructure.

Where Japan cannot compete with Hong Kong is on proximity to China. Hong Kong is a natural place for Chinese firms to list geographically and the big organizations will drive liquidity to HKEX. As the Chinese economy booms, we expect many firms to be looking for IPO opportunities and HKEX, with its now relaxed listing rules, can address this easily. The through train connection will drive liquidity further by opening trading up to approved Asian brokers without a Hong Kong license.

The HKEX three-year plan is exciting as it includes a range of strategic moves which will secure its position. Within this HKEX includes the expansion of its southbound connect to provide mainland Chinese investors with improved access to the world’s financial markets. It envisages facilitating mainlanders to trade currencies, bonds, ETFs and other commodity products on HKEX at some point in the near future.

Access to the Yuan is essential for many firms that conduct business in China, so if HKEX positions itself as the premier source of this then these firms will be able to effectively hedge their currency exposure.

By making it easier to access, China is demonstrating its flexibility and willingness to attract international trade, and at the same time making Hong Kong a strong competitor to permanently secure the gateway to Asia crown.

As an ex-British colony, Western firms will also find reassurance in Hong Kong’s familiar legal and business systems and with English widely spoken there is no language barrier. Its dense banking sector has been established for many years and includes a wealth of banks, asset managers and financial firms already in situ.

As we look at the Asian markets today, we have many strong markets and diverse opportunities, but with Hong Kong firmly lining up as the gateway to Asia it would be prudent to include it in your Asian trading infrastructure. Access via TNS can be established in a matter of days and includes flexible low latency hosting, market data and connectivity options. To find out more please visit www.tnsfinancial.com or contact Jeff via solutions@tnsi.com.

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