Transcript
Speaker: Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
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Speaker: This podcast was recorded for publication on the 10th of July by HSBC Global Investment Research. Analysts' notifications, disclosures and disclaimers must be viewed on the link attached to your media player.
Speaker: Hello and welcome to Under the Banyan Tree, where we put Asian markets and economics in context. I'm Fred Newman, chief Asia economist here at HSBC. We're coming to you as ever from Hong Kong, and this city is very much the focus of today's podcast. It's taken a while, but there's a sense of a new life.
Speaker: being breathed into Hong Kong and with a pandemic and ever more distant memory, things do feel like they're on the up. But does the data support this feeling? Joining me today are Head of Hong Kong Equity Research Michel Kwok and Greater China Economist Aaron Shin.
Speaker: We're going to take a look at Hong Kong's financial markets, fund flows, property, tourism and more. Let's get the conversation started right here under the banyan tree.
Speaker: Okay, welcome back everybody to the studio. So I'm joined here by two experts on the Hong Kong economy, one of course being Michelle Kwok, who is our head of equity research in Hong Kong, and also Aaron Shin, who is our greater China economist, but also focuses on the Hong Kong economy.
Speaker: economy And the reason why we invited these two ladies to join us here in the studio today is because there is a bit of a buzz coming back in into Hong Kong. So I've been here 19 years and, you know, there's some ups and downs and this is a very cyclical economy. And of course, we had COVID-19 like other economies as well. We had...
Speaker: um You know, flights were canceled in out of Hong Kong and things were slow going, but suddenly the streets are fuller. There seems to be... It's hard to get a taxi, actually. Maybe that's because a fewer taxis around, but it's just hard to get a taxi.
Speaker: And so it does feel a little bit that Hong Kong is coming back. And I wanted to kind of delve into that a little bit. and um One area to start with is, of course, the financial sector, because that's a large part of the economy. I think, Erin, correct me if I'm wrong, but I think it's about a quarter of the economy or so. About 20%. About 20% of the economy. So one of the largest sectors here. And of course, within that, it is the equity market, Michelle, that is you know the driver, right? If you think about Hong Kong as a financial center, it is equities. It's a
Speaker: you know is That's the dominant asset class, if you will. Now, tell us what's going on the equity market. What's this sentiment like? I think we had four or five years of down years is in the equity market, but suddenly something, there's a spark, isn't there, among equity analysts and investors in Hong Kong suddenly. What's driving that?
Speaker: Definitely, Fred. I think the equity market is up 20%, domestic equity market up 20% year to date. um It's a big number and a very significant outperformance.
Speaker: What drove that initially is just money coming from mainland China. It's what we call the southbound, you know the money that's flowing into Hong Kong. um And then the sudden squeeze in the local rates in Hong Kong that actually made equity a very, very interesting investment proposition. So when you say a squeeze, you mean that interest rates fell in Hong Kong, encouraging people to buy more equities because they're playing on dividends or expecting dividends to be paid at a higher than the interest rate they would receive
Speaker: Yes, and of course there has also been quite a lot of IPOs in Hong Kong, the initial public offerings. And in fact, in the first half of the year, Hong Kong ranks number one in terms of the amount of capital raised globally.
Speaker: Now, that that's interesting. what What does this mean? Let's put this in perspective. So what you're saying is Hong Kong is, of course, a large equity market. But when you say it's the number one market for equity raising this year, that means that companies have been able to do IPOs or other equity issuance and raise money. And if actually raised more money here, you're saying then in, say, New York or London or Tokyo and other part places in the world?
Speaker: Yes, from a global perspective, so much more than other parts of the world, including, say, New York. So Hong Kong is number one year to date. So that is very important because in the context of what you mentioned at the beginning of this podcast, we've had a very tough market for more than a few years now.
Speaker: And so that swift turnaround in performance, It's very encouraging for corporates looking to raise money. And there is then this mentality that corporates are fearful of missing out um if they do not you know take the opportunity to capture this window to raise capital. And suddenly everybody's coming here and and raising money. and And now suddenly investment bankers have a bit more of a spring in their step, I guess, Hong Kong. That's right. yes That's maybe where goes. Much more to look forward to. Yeah, much more. The pipeline is still full. We know that there's still a lot coming second half of the year. Very rich. I think 200 applicants or so. 200 applicants. So this is obviously would be potentially a record year for Hong Kong. We don't know in terms of numbers, but this is certainly a very, very high number.
Speaker: To put a little bit of that in perspective, you mentioned that there is money coming from China, mainland China, into Hong Kong. And I think that is is an important point because if you think of Hong Kong as a financial center, really its role for probably 20 years was – the intermediation of global capital into China. What we mean by this is essentially Hong Kong bankers facilitated the investment by global investors into mainland China. So this was factories, this was equities, this was all sorts of you know financial and legal services around this investment.
Speaker: um I think there was a sense that this flow had slowed down in part because China has itself, so much capital now, it doesn't really need foreign capital. It has its own know-how. So that flow probably slowed down, partially for commercial reasons, maybe also for because of geopolitical tensions. But the main point here is that really what's now happening, what seems to be happening, is a reversal of that, whereby Hong Kong is now taking Chinese capital Chinese savings and they're kind of pushing it to the rest of the world. And so you hinted at something, Michelle, is that we have a lot of inflow from Chinese, mainland Chinese money coming into the Hong Kong stock market, driving up demand for equities. And that obviously then
Speaker: raises valuations, gets more activity, IPOs. And and that's partly because we have essentially getting mainland capital to come in here. um But Aaron, I want to bring in you here because that's really an equity view. There's other channels of inflows from mainland China into Hong Kong. But put us a picture around this. First of all,
Speaker: The saving rate is very high, and they don't really need all the savings in mainland China. So it's starting to kind of you know flow into into Hong Kong. is that Is that how we should think about it? So a few things to consider is that mainland China still has some capital controls. And as Hong Kong is a key gateway between mainland China and the rest of the world, we've got these very unique programs. They're called Connect programs, and they're across different avenues. So one is the Stock Connect, as Michelle has mentioned. We also have Bond Connect. It's been recently developed.
Speaker: considered that maybe they'll be adding some more quotas for the bond connects here. um They've also recently launched things like Wealth Connect, Swap Connect, recently also had Payment Connect. So these are all very it technical terms, but what they really means are channels by which mainland Chinese savers can take money into Hong Kong, which previously was harder to do. Is that is that right?
Speaker: Yes. So basically, it's a controlled way for them to move the capital between mainland China into Hong Kong in a kind of closed loop system um that is then they can, you know, distribute it to various investment choices.
Speaker: So essentially, you had an economy, mainland China, that had capital controls. That meant that an individual Chinese couldn't really take their savings outside of mainland China.
Speaker: um There were some exceptions, like you could take maybe US$50,000 per year, but there was a lot of paperwork involved with that. But really what's happening now is suddenly – We have regulatory changes where mainland Chinese officials allow essentially bit more money to flow, right?
Speaker: And so it might flow into the equity market, it might flow into the bond market, other savings products. And so that seems to me a game changer for China. Hong Kong because that means that suddenly the savings you have in mainland China can flow into the Hong Kong economy and kind of revive the domestic financial system.
Speaker: And that's maybe why we see also this this you know renewed vitality in the equity market. It's not the whole story, but certainly it it's built around this. um Now, this is obviously gives the Hong Kong economy a bit of a kick, but I wanted to broaden out the discussion about what it means not just for the financial sector, but also for the overall economy. And Michel, let me come back to here.
Speaker: So one other important sector is obviously the real estate market. Now, you're also an expert on on the real estate market, mainland China, but also also Hong Kong. um What have you observed here? because Obviously, with all the economic challenges, property prices have declined and in Hong Kong as if elsewhere. That's very important for the local population.
Speaker: There's a lot of wealth that sits in property. Is there a bottoming out happening here? Is the the enthusiasm and the equity market starting to spill over into the real estate market?
Speaker: Yeah, so ah building on what we discussed earlier, um real estate is extremely interest rate sensitive. So when we have lower domestic interest rate, we have already seen an increase in transaction volume in the Hong Kong property market.
Speaker: We have seen developers being able to sell their projects easier. Some developers have been able to leave home price a little bit ah just to capture the opportunity there.
Speaker: And we have also seen banks actually having a more, um I think, proactive approach in offering rebates ah for prospective home buyers. And very interestingly, the one factor that I think would really contribute to the positive momentum here is when we look at the Centerline Valuation Index, this index actually... This is a property price index published by Centerline, which is a a property broker? Property broker, but what actually it reflects is banks' property valuation appraisal.
Speaker: And that to us has been quite encouraging because it means that banks' valuation on properties for people looking to purchase a flat, that valuation is much less aggressive recently.
Speaker: So for people… Less aggressive meaning banks are offering higher valuation. Higher valuation. So that means banks are more confident that actually the market is turning around. That's So it's not just a buyer. You're saying the banks themselves are… The banks are facilitating transaction. Are facilitating Now, this this is interesting, but, Michelle, I want to probe little bit further. You're talking about the residential market. I'm talking about the residential yes. What about the commercial property market? Because here we've had bit more headwinds, didn't we?
Speaker: Yeah, I think surely the office market has been very, very tough. Remains pretty much, I think, a market view that the challenge is here to stay. But I think the one very interesting thing that we have seen lately is is the notable transaction, probably one of the largest commercial office leasing transaction that we have seen in decades.
Speaker: um is Jane Street, which is a liquidity provider and a quant trading firm. It's a U.S. financial institution. That's right. jane from yes Taking up around sixth floor um at an upcoming project in Central, a premium grade A project.
Speaker: So that to us is boost of confidence. It basically reaffirms Hong Kong's status as an international financial hub. um So Jane Street willing to take up the space there would ease the pressure in the commercial radio real estate market um and also hopefully reset pricing in the commercial real estate market. So that that's a good signal. that That's a vote of confidence for commercial real estate, but also a vote of confidence then into the financial sector of Hong Kong if you have a major U.S. financial institution.
Speaker: taking out this big lease in Hong Kong. um So certainly, again, the stories here fit together. Now, maybe this is a great moment. Take a quick break. And when we come back, I'm going to talk a bit more about ah retail assets. That is malls, for example, that's tied into the retail sector of the economy, which has been struggling as well.
Speaker: So welcome back, everybody. We talked about sort of this revival in the Hong Kong financial sector and how that is spilling over into the rest of the economy. Now, Aaron, um clearly a big part of the economy retail, shopping. Hong Kong has been the shopping mecca for many, many years. We have these glitzy malls everywhere.
Speaker: um But here are two things were not going as well in the last few years. Give us a perspective on that. Right. So historically, Hong Kong's retail sector has seen, you know, a lot of drivers from mainland Chinese tourists.
Speaker: um Over the last few years, since the reopening after COVID-19, we were expecting that there'd be more mainland Chinese tourists coming back to Hong Kong, but it's been a little bit more gradual than we expected.
Speaker: So that's provided a little bit of pressure. but and why Why are the Chinese tourists so important for the retail sector? Is that because they drive shopping in Hong kong so Mainland Chinese visitors before the pandemic were averaging about 4 to 5 million per month.
Speaker: That's more than half of the population of Hong Kong. So that's quite a lot of visitors. We're not quite back to that level yet. We're probably only about two thirds to three quarters of that level.
Speaker: So that has played a role in why the retail sales have been kind of a little bit more sluggish. You know, mainland Chinese consumer sentiment, still a little bit weak there.
Speaker: And they aren't spending as much per capita, too. So that has all kind of weighed on the retail sector. But then the other side of that matters, too. There's more Hong Kong residents going elsewhere and spending. was just about to ask you. is that, you know, there's a flow in the other direction as well, right? Hong Kongers are going shopping in Shenzhen, which is ah just across the yeah the border was with mainland China.
Speaker: Yeah, there's a you know a value proposition here where you can go to Shenzhen, you can get your hair cut for a much lower price. So we have seen that Hong Kong residents have been kind of going outward quite a bit.
Speaker: But you know the recent month, we've been seeing a little bit more of an improvement in some of the mainland visitors. ah It does have some volatility here, but maybe some of the strengthening of the RMB rate ah has played a role in that.
Speaker: But the government's also trying to kind of explore new avenues to drive people to Hong Kong. So we have these mega events. um They just built out this new stadium, Kai-Tec Stadium, capacity of about 50,000.
Speaker: The Hong Kong 7th rugby tournament yeah was there. of course, that was the first event. um But then there was also concerts now. Coldplay came over. Coldplay came there. Yes, we have concerts now almost on a weekly basis here in in Hong Kong. So that is that helping?
Speaker: Yes. So I think that it's actually a healthier way to think about, you know, driving consumption in the economy. In the past, people from the mainland just coming to buy luxury products.
Speaker: Maybe that doesn't necessarily add as much value add. But if instead we're turning more towards services, more cultural things that builds goodwill, that is actually really good for Hong Kong's economy from a more kind of medium and longer term perspective and from a value add perspective as well.
Speaker: So here too, there's some green shoots, although there's a long way to recovery. In fact, um one statistic I saw the other day is that restaurant sales in Hong Kong today are still 8% below the 2018 level, in part because many people are going to Shenzhen across the border to eat dinners on Friday and Saturday nights.
Speaker: And you can tell this from this data because Chinese restaurant sales are particularly down, whereas other cuisines is is not not down as much. And presumably you go to mainland China to have a Chinese cuisine. But, Michel, what does this mean for all these glitzy malls in Hong Kong and all these – these are assets that are held by large ah Hong Kong companies. It's big part of their portfolio.
Speaker: um Hong Kong has been, as I said, the shopping mecca. What are we doing with all these malls now? Well, I think surely the retail scene remains somewhat challenging. Retail rents remain under pressure for the rest of the year, we think.
Speaker: um But we think the magnitude of decline is going to narrow somewhat. ah But very interestingly, when we think about and we chat with some of the discretionary retailers, it seems that their recent momentum in terms of retail sales has improved somewhat as well.
Speaker: So retail becomes a very, very interesting landscape whereby so select retailers can still turn in very respectable retail sales numbers while others may struggle a little bit more.
Speaker: But when you look at the non-discretory spectrum, um the traffic there is still outperforming the broader market, so somewhat resilient. But this is not to say that challenges are now behind us.
Speaker: ah It's a market whereby I think landlords are still trying very hard to either transform themselves or think about what the future consumers are actually after. And I think that's that's a good note to end on because I think one thing we can all agree on if you look at Hong Kong's history is the amazing ability to reinvent itself, right? It's not the first time this economy has essentially retooled itself. And I'm always amazed at how quickly things change here, how adaptable businesses are, and
Speaker: And so this is just a repositioning of Hong Kong. And we might be surprised actually how quickly ah Hong Kong comes back. But anyways, both of you, thank you very much. We'll check in again in a few months, see how this story evolves. But I do think there is a bit more of a buzz on Hong Kong streets now. And so we'll be keen to see how things evolve from here. Thank you very much.
Speaker: Thank you. And that's a wrap for this week's episode. Many thanks as always for joining us under the banyan tree and do continue to tune in throughout the summer period. From all of us here in Hong Kong, take care and we'll talk to you again very soon.
Speaker: Thank you for joining us at HSBC Global Viewpoint. We hope you enjoyed the discussion. Make sure you're subscribed to stay up to date with new episodes.
