Chinese Crackdown Isn’t Chilling Hong Kong’s Hot Financial Core

(Bloomberg Businessweek) -- Hong Kong people love to stir-fry. Not just food—it’s the Chinese term for investing in stocks. And about 1 in 5 residents were ready to fry up a piece of the initial public offering of Ant Group Co., Jack Ma’s fintech company, before its early November listing was scuttled at the last minute by Chinese regulators. It was a crushing blow to what was expected to be the biggest IPO ever. But within days, investors were eyeing other listings on the menu.

While it may not be apparent from the headlines about China’s crackdown on dissent in Hong Kong, there’s been an easy-money frenzy of late. On Nov. 11, the same day opposition lawmakers resigned en masse to protest the disqualification of four of them for insufficient loyalty to China, Bright Future Technology Holdings Ltd., a Shenzhen-based mobile advertising company, debuted on the Hong Kong exchange. Its shares popped 32%. And more are on the way, enough that listings are still on track to beat last year’s $40 billion total, even without the Hong Kong portion of the Ant offering, which has been postponed at least until next year.

“Investors remain eager for upcoming good IPOs,” says Steven Leung, a Hong Kong-based executive director at UOB Kay Hian, pointing to Chinese companies looking to raise $1 billion or more in the coming weeks, including JD Healthcare Ltd. and consumer-products maker Blue Moon Group Holdings Ltd. Kuaishou Technology, ByteDance Ltd.’s smaller rival, filed for a $5 billion listing days after Ant’s was killed. “The IPO market will continue to be hot towards yearend.”

To live in Hong Kong these days is to attempt to reconcile two worlds—a hot Hong Kong where a government-fueled boom has bankers working overtime, and a chilled one for free expression following the imposition of China’s national security law in June. As the power of China and its grip on Hong Kong grow stronger, the city is being forced to accept its seemingly inevitable fate: becoming an increasingly Chinese city under Chinese laws, a gateway for its billions in capital flows, while simmering with discontent and crushed hopes. “There’s a real disconnect between the business world and the local world, but all of us in Hong Kong are getting used to living with fear to various degrees in a way we haven’t before,” says Antony Dapiran, a lawyer and author of two books on the city’s protest movements.

Hong Kong isn’t the only place where stock markets are disconnected from the real economy, but with so many Chinese companies looking to go public, and with others that debuted in New York seeking secondary listings in the city, it’s been a busy year for bankers. During a recent Friday happy hour, one of them who works at a bank that has sponsored several offerings says he doesn’t have time for a drink—just a quick tea. He needs to get back to his desk, he explains, where he plans to work until midnight, maybe 1 a.m., the usual these days. His bank set an internal record for trades executed in a single day this year, and the volume has kept everyone hopping, he says, giving his name as Daidai so his employer can’t identify him, as he’s not authorized to speak. “It was always very busy, but now it’s at a higher level,” he says.

Yet just when sleep-deprived bankers are heading home for the night, 24-year-old Joshua Wong will go to bed wondering if he’ll be awakened in the morning by police coming to arrest him. “The worst time might be midnight, before you sleep,” says Wong, a pro-democracy activist who has done three stints in prison, over a lunch of steamed fish and double-boiled mushroom and pork soup. “The best way to overcome the fear is not to think about it every day. It’s better to think about how to continue the fight.”

None of the underlying reasons for last year’s outpouring of almost 2 million protesters has been resolved. Rather than move toward democracy, as protesters demanded, Hong Kong has gone in the opposite direction: Legislative Council elections postponed for a year, pro-democracy candidates disqualified, and moderate lawmakers ousted for not being patriotic enough.

The contrast between what’s going on in the streets and in the markets makes for jarring juxtapositions. The September debut of Chinese bottled water company Nongfu Spring Co. was oversubscribed 1,100 times by retail investors, making it the most popular Hong Kong IPO of the past decade. Yet the opening bell rang just 36 hours after police charged into a crowd of protesting teenagers and arrested 300 people. Two days before Ant filed for its IPO in August, 12 activists fleeing Hong Kong by boat for Taiwan were captured by China’s coast guard and taken to prison on the mainland. On a day in early November, when demand outstripped supply four times over for $5 billion worth of inflation-linked bonds, police launched a hotline urging citizens to report each other for violations of the national security law. What critics have been calling a “snitch line” drew 1,000 tips in the first few hours.

The fear is as palpable as the finance frenzy. Beijing’s representative in Hong Kong, Luo Huining, announced on the eve of China’s Oct. 1 National Day that Hong Kongers must now love China out of “obligation,” not choice—which some on social media likened to a permutation of an old saying: “The beatings will continue until morale improves.” Thousands of riot police posted on Hong Kong’s streets that day threatened to stop anyone daring to show otherwise. Carrying banners, possessing stickers, or shouting slogans previously used by protesters all now violate the new law, and 28 people have been arrested. Hong Kong’s government and Beijing’s emissaries have repeatedly said that the law would affect only a small group of radicals and that the city’s freedoms would be preserved.

Some in Hong Kong’s financial industry, like Alvin Fan, chief executive officer of hedge fund platform OP Investment Management, say the national security law has been a boon, allowing the city to get back to the business of making money. His firm is having a record-breaking year for raising assets, and the actively managed hedge funds on his platform are up 16%. “Not only financial stability but just stability is really important,” says Fan, whose biggest concern is that headlines about crackdowns will continue to raise fears abroad and deter cash flows. “Investors vote with their dollars at the end of the day.”

David Webb, an activist investor with longtime involvement in the Hong Kong market, says China is willing to bear the considerable costs to its international standing as a result of its “full iron fist” approach to Hong Kong. That’s because it will help China absorb the city into its plan for the Greater Bay Area, which aims to create a tech hub rivaling the San Francisco Bay Area, he says. Hong Kong residents who take up a U.K. offer of residency will simply be replaced by mainland Chinese. “They’d rather turn Hong Kong into another province of the mainland, because the higher priority is not having the protests and not destabilizing the city,” Webb says.

Even if large-scale protests could take place, the media’s ability to cover them has been curtailed. New police guidelines don’t recognize freelancers, student journalists, and online news reporters, many of whom had taken the biggest risks to chronicle last year’s unrest. Those deemed credible must self-censor or face pressure from management, according to the Hong Kong Journalists Association. Before an August raid on the headquarters of opposition newspaper Apple Daily and the arrest of its founder, Jimmy Lai, on suspicion of violating the national security law, Hong Kong had dropped to 80th place on the Reporters Without Borders annual press freedom index, from 48th in 2009.

Public rebukes of Hong Kong professionals appear almost daily. Pro-China newspapers attack judges deemed too lenient in the cases against almost 10,000 protesters arrested since mid-2019. After an elementary school teacher was banned from the profession for life in September for teaching a lesson before the new security law went into effect on why some people were calling for independence, a former chief executive of the city posted on Facebook the personal information of 18 other educators facing protest-related charges. He said parents deserve to know who is seeking to radicalize their children and urged them to report other teachers. China’s Liaison Office in Hong Kong has urged cutting off the “black hands” in the school system. Many teachers now fear classroom discussions could result in children reporting them to parents, ending their careers. Meanwhile, books advocating democracy, including those by activist Wong, have been pulled from the shelves of school and public libraries.

The increasing use of Communist Party vernacular, public shaming, and encouragement of citizens to report on others, while not as extreme as what happened during China’s Cultural Revolution, is alien to most Hong Kong residents and is altering the fabric of society. “It makes the pro-democracy individuals fearful, leads some to flee, and strikes fear in the rest of the community,” says Maya Wang, a senior researcher for Human Rights Watch. “Beijing is perhaps trying to replicate in Hong Kong an important mechanism of social control in China: a culture of informants. Authoritarian governments rarely go at it alone—they rely on the power of the masses.”

For now, the two Hong Kongs coexist. Foreign companies and international banks aren’t fleeing, and the opportunities for making money aren’t vanishing. That’s not likely to change, regardless of what form Hong Kong’s government takes, not as long as China’s currency controls make the city a place for mainland companies to raise capital on a stock exchange where they constitute two-thirds of the market cap. A recent change to allow listings of dual-class shares has made the city even more attractive to Chinese companies at a time when anti-China rhetoric in the U.S. has prompted some to seek secondary listings in Hong Kong. And U.S. sanctions and revocation of Hong Kong’s trade privileges have done little to dampen sentiment. China's bet that it could maintain Hong Kong as an international finance center while cracking down on dissent appears to be paying off. “This remains a foreign currency ATM for Chinese companies,” says Dapiran.

It’s not all rosy for China in Hong Kong’s financial markets. Several offerings didn’t immediately catch on with investors, including Yum China Holdings Inc., which operates KFC restaurants in China. Its secondary listing in Hong Kong in September fell 6% before recovering to its offering price a month later. The postponing of the Ant IPO left bankers missing out, at least for now, on an anticipated $400 million in fees. Some brokerages are sharing the cost of margin loans with their investors, though they say all the money pledged for shares is being returned.

Hong Kong’s real economy remains in recession, contracting 9% in the first half and 3.5% in the third quarter. That’s a recipe for discontent. It’s also a reason many Hong Kongers want to continue the fight—to at least keep officials aware that people need government to work for their benefit, not only for the developers, tycoons, and Beijing-connected elites who control the city’s economy and political structures.

Holding them accountable is the role of activists, says Wong, who spends his days taking on causes such as a campaign to free the activists caught fleeing to Taiwan and raising global awareness about Hong Kong’s diminished freedoms. “What we are trying to do is keep up the momentum,” Wong says. For investors, or anyone who might think Hong Kong is content with the surging IPO market and its ability to mint billions, Wong has a message: “We will never give up.”

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