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Citi

Addressing Key Questions on Hong Kong

Amid tensions between US and China, Hong Kong’s (HK) prospects have come under pressure. Citi analysts share their views on key financial and economic questions from investors.

 

How might HK's role evolve for international finance and for China?

  • HK remains a key gateway for capital into and out of China.
  • HK's significance in global equities is unparalleled, with its IPO value ranked number one in 2019 and may keep the spot in 2020.

 

How is the revocation of “special status” likely to impact HK?

  • On July 14, President Trump signed the HK Autonomy Act into law and ordered an end to HK’s special status with the US, which would have the following immediate impact - HK to be treated as China in trade with US.
  • Exports to the US from HK would be treated as from China, subject to higher tariffs and applicable restrictions. But only 7% of HK’s exports went to the US in 2019. Imports from the US would be subject to more restrictions, particularly tech products. But only 4% of HK’s imports come from the US.
  • HK’s biggest trading partner is Mainland China. Chinese firms prefer to re-export from HK to global destinations because HK has lower business income taxes and it is more cost efficient to book export revenue in HK versus Mainland China. This aspect will not be affected by the removal of “special status”.

 

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No sanctions for now, but if there were, how might financial institutions be affected?

  • The State Department could review HK's situation every year and make recommendations about sanctions. If sanctions materialize, they are likely to be targeted on individuals and entities, rather than directly on financial institutions, and much less likely on the whole financial system of HK or China.

 

How might HK's equity market perform amid uncertainties?

  • Citi analysts expect sectors related to tourism and consumer services to be more sensitive to reopening.
  • More broadly, HK equities had been more reserved compared to the A-share rally in July, leaving HK valuations still low at just 1.0x P/B and 10.6x P/E.
  • Capital inflows to HK are strong due to the home-coming of Chinese ADRs amid US-China tensions.

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