Canadian firms risk missing out on Hong Kong

China’s rampant economic expansion is hardly a new story, and Canadian investors have been increasing their allocation in the awakening giant ever since it started to stir. But the Canadian financial services sector could be missing out on a real opportunity for expansion, according to one government official from Hong Kong.

“Don’t miss the boat — late is better than never,” says Frederick Ma, Secretary for Financial Services and the Treasury. Speaking to a lunchtime audience at a presentation hosted by the IIAC in Toronto on Tuesday, Ma said there are already a handful of Canadian companies making inroads into Hong Kong, but that too many appear hesitant.

“Among all the financial institutions, Canadian insurance companies have done the best,” Ma says. “I think all Canadian financial institutions can do as well, because you are all world-class operations. There is no reason why the Canadian banks can’t do as well as Manulife or, for that matter, the Goldman Sachs and Morgan Stanleys of the world.”

For the investment community, he says, the best way to get exposure to the Chinese market is to buy Chinese stocks on the Hong Kong market, as they are under a more rigorous regulatory regime than those listed in Shanghai.

“The best way for Canadian financial institutions to participate in [the Chinese] market is Hong Kong,” he says. “You can use Hong Kong as your gateway into China. It is the best gateway because it is in China.”

Ma also recommends that fund managers and private bankers set up shop in Hong Kong to gain exposure to China’s own investing public. Investment fund assets have been growing at a rate of 25% in recent years, and now total $580 billion US. In fact, there are over 90 million retail investment accounts in China — approaching three times the entire Canadian population.

Ma is uniquely acquainted with both the Hong Kong and Canadian financial industries — he worked in Toronto for nearly a decade in the late 1970s and early 1980s before moving back to Hong Kong.

He recalls working in Hong Kong for Dominion Securities at the time of the 1987 stock market crash. When he heard the news at 5 a.m., he called Toronto and asked why no one had alerted him. In all the confusion, the head office had “forgotten” the Hong Kong office. Twenty years later, it’s hard to imagine Hong Kong being forgotten.

The 1987 crash spurred Hong Kong to adopt a statutory regulator, which in turn improved that market’s image among foreign investors.

“That is probably the key to our success as a financial centre,” Ma says. “Investors want to invest in a market that is regulated. Our regulatory regime is on par with any international regulator.”

A recently published report by the City of London ranked Hong Kong as the world’s third greatest financial centre, behind only London itself and New York. The traditional hub of Asian finance, Tokyo, ranked ninth.

Thirty years ago, the Hong Kong Stock Exchange’s market capitalization was $11 billion US, with an annual turnover of $1.3 billion. Today, the market cap stands at $1.7 trillion, with annual turnover of $1 trillion.

“We now execute the annual turnover from 30 years ago within one hour,” he says.

Hong Kong flourished as a British colony, but many investors around the world were nervous when it was handed back to China in 1997. There were fears that the economic liberty enjoyed by the city-state would be extinguished, with some predicting the People’s Liberation Army would be on every street corner.

These fears have proven ill-founded. Hong Kong enjoyed GDP growth of 6.8% in 2006, while the current unemployment rate of 4.3% is the lowest since 1997, when British colonial rule ended. And sightings of the PLA are rare, according to Ma, aside from the annual invitation that the local military base extends to the public to tour the facility.

“In the tenth anniversary of reunification, it is very important for us to showcase to the world that ‘one country, two systems’ works very well in Hong Kong today,” Ma says.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com

(04/27/07)

Steven Lamb