Hong Kong
01 June 2010
There has been a real flight to quality in this hub, but the markets are still reporting positive figures despite the downturn
Image: Shutterstock
Compared to other territories, the securities lending industry in Hong Kong has not been hit as hard by the credit crunch, and business is picking up in the first half of this year. But the number of participants has fallen, in part due to increased conservatism amongst lenders, and consolidation has meant that the big firms have got bigger, while smaller companies have disappeared from the radar.
“At the end of 2008 there was a lot of fear in the market and, while it never really stopped, the vast majority of trades were carried out on an almost risk-free basis - anything that wasn’t as conservative as possible was ruled out by all the big name firms,” says one representative of a large global bank.
“But it was more about a fear of what may happen, instead of a reaction to what actually was happening in Hong Kong and once we realised it wasn’t going to be as bad as we all thought, the market opened up a bit. 2010 has been better than 2009, and hopefully 2011 will be better than 2010. We’re still fairly risk averse, we’re keeping an eye on what happens in Europe, and particularly what happens in China and there’s still a long way to go before the market is entirely comfortable again.”
This flight to quality was reflected in the stocks that were most popular, with the largest global and Chinese stocks taking up a disproportionate share of the market. Indeed the problems affecting the banking sector and Western economies meant that traders almost invariably looked to the East.
“The collapse of Lehman pushed traders’ minds in a different direction,” says one expert. “Hong Kong has of course always had one eye on our neighbour but until 2008 we also had a big investment in Europe and the US. The pendulum has truly swung to China now, and I don’t know if it will ever switch back.”
But this is reflective of the financial markets as a whole - the chief executive of HSBC, Michael Geoghan, has recently relocated to Hong Kong from London, arguing that most of the growth is going to come from this region. But it also leaves Hong Kong in some jeopardy, as the Chinese markets begin to flex their securities lending muscles.
At the moment, Hong Kong is on top, and is likely to remain that way for some time. In part this is due to the regulatory environment for securities lending - although discussions are ongoing regarding short selling regulations, there were no temporary bans. The Chinese regulators are looking at securities lending as a means to increase liquidity, but still have some way to go.
But it’s not just the securities lending environment that favours Hong Kong. Already, all the big international players have a major footprint on the island, and indeed many have privately said they will keep their base here as a gateway to the Chinese market, even if they do increase their presence on the mainland. Hong Kong is up there with London and New York as one of the three major banking hubs and it seems unlikely that mainland China even wants that to change, let alone encourages it.
“Hong Kong has the history, the infrastructure and the legacy of plenty of companies established here,” says one expert. “I know the Chinese are aiming to have a huge presence of their own in this market but I don’t believe it will take over Hong Kong’s activities. Everything is already set up, people like living here and there is a huge appetite for growth in this market.”
The territory is also an attractive taxation environment for the securities lending market, with an exemption from Hong Kong profits tax for stock borrowing and lending transactions. It allows disposals and reacquisition of ‘specified securities’ under certain agreements to be exempt from the tax.
Essentially the conditions under which companies are exempt mean the lending agreement must be used by the borrower for a specified purpose and stock of the same description must be returned to the lender within a specified period. The lender must also receive compensation for any distributions received by the borrower.
“At the end of 2008 there was a lot of fear in the market and, while it never really stopped, the vast majority of trades were carried out on an almost risk-free basis - anything that wasn’t as conservative as possible was ruled out by all the big name firms,” says one representative of a large global bank.
“But it was more about a fear of what may happen, instead of a reaction to what actually was happening in Hong Kong and once we realised it wasn’t going to be as bad as we all thought, the market opened up a bit. 2010 has been better than 2009, and hopefully 2011 will be better than 2010. We’re still fairly risk averse, we’re keeping an eye on what happens in Europe, and particularly what happens in China and there’s still a long way to go before the market is entirely comfortable again.”
This flight to quality was reflected in the stocks that were most popular, with the largest global and Chinese stocks taking up a disproportionate share of the market. Indeed the problems affecting the banking sector and Western economies meant that traders almost invariably looked to the East.
“The collapse of Lehman pushed traders’ minds in a different direction,” says one expert. “Hong Kong has of course always had one eye on our neighbour but until 2008 we also had a big investment in Europe and the US. The pendulum has truly swung to China now, and I don’t know if it will ever switch back.”
But this is reflective of the financial markets as a whole - the chief executive of HSBC, Michael Geoghan, has recently relocated to Hong Kong from London, arguing that most of the growth is going to come from this region. But it also leaves Hong Kong in some jeopardy, as the Chinese markets begin to flex their securities lending muscles.
At the moment, Hong Kong is on top, and is likely to remain that way for some time. In part this is due to the regulatory environment for securities lending - although discussions are ongoing regarding short selling regulations, there were no temporary bans. The Chinese regulators are looking at securities lending as a means to increase liquidity, but still have some way to go.
But it’s not just the securities lending environment that favours Hong Kong. Already, all the big international players have a major footprint on the island, and indeed many have privately said they will keep their base here as a gateway to the Chinese market, even if they do increase their presence on the mainland. Hong Kong is up there with London and New York as one of the three major banking hubs and it seems unlikely that mainland China even wants that to change, let alone encourages it.
“Hong Kong has the history, the infrastructure and the legacy of plenty of companies established here,” says one expert. “I know the Chinese are aiming to have a huge presence of their own in this market but I don’t believe it will take over Hong Kong’s activities. Everything is already set up, people like living here and there is a huge appetite for growth in this market.”
The territory is also an attractive taxation environment for the securities lending market, with an exemption from Hong Kong profits tax for stock borrowing and lending transactions. It allows disposals and reacquisition of ‘specified securities’ under certain agreements to be exempt from the tax.
Essentially the conditions under which companies are exempt mean the lending agreement must be used by the borrower for a specified purpose and stock of the same description must be returned to the lender within a specified period. The lender must also receive compensation for any distributions received by the borrower.
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