Like New York, Hong Kong has been declared dead more than once. The 1990s were particularly gloomy. With the handover to China in '97, many predicted that the onetime colony would lose its distinction--British rule of law--and fade in competition with younger, hotter Chinese cities. Singapore saw such clear signs of demise that it offered 40,000 visas to Hong Kong professionals, particularly those in finance and related fields. By the early 2000s most bets were on Shanghai, located at the heart of the mainland boom, as the city that would topple Hong Kong.
And yet Hong Kong is still on top. Its stock market is near 10-year highs, and the economy has been growing at an annual 5 percent since 1989 --blazing fast for a city this wealthy. Property prices are expected to falter this year, but by last month they had doubled from their post-handover low. Singapore never filled those 40,000 visas with Hong Kong professionals. And after zooming upward, Shanghai has now settled into a secondary role as the leading financial center on the mainland itself. Since 2003 the total value of the Shanghai stock market has fallen by $37 billion to $313 billion, along with its share of global stock-market capitalization (from 1 percent to 0.7 percent). In that time Hong Kong's value has risen by $500 billion to $1.2 trillion, for a 2.7 percent global share. This is tiny compared with Asia's major financial capital, Tokyo, but nonetheless dominant in the Chinese market.
One reason naysayers are consistently wrong about Hong Kong is that they overlook the critical characteristics of truly global financial centers. As nations become more firmly tied to one another by trade and investment flows, they increasingly manage those flows through their key international center. Some are old (London); others are new (Sydney). But they share distinct characteristics, in particular the talent and culture to mediate between distinct national business practices and an increasingly standardized global financial system.
In 1999, when predictions of Hong Kong's demise were at a peak, I wrote in Foreign Affairs that its features as a financial center ensured its future. Shanghai can replicate Hong Kong's technical connectivity, but it still can't match Hong Kong's extensive business networks, its systems of trust and its regulatory framework. The pro-free-market Heritage Foundation has ranked Hong Kong No. 1 in the world for "economic freedom" 10 years in a row, and rightly so. And Hong Kong is far more deeply internationalized than many larger financial centers, including New York, with almost 60 percent of its banking business denominated in foreign currencies.
That said, China is particularly interesting among major trading nations in that it is the only one, other than the United States, that is cultivating two financial capitals with distinct specialties. Hong Kong (like New York) is a genuinely global platform, whereas Shanghai is a national platform with increasingly global reach--on its way to becoming the Chicago of China. This means that the rivalry between the two is not a zero-sum game. For instance, overall New York dwarfs Chicago as a financial center, but Chicago is the global leader in futures on agricultural commodities.
Hong Kong has two specialized roles in two distinct sets of networks. First, as the rivalry between Shanghai and Hong Kong has settled into a clearer division of function, Hong Kong's role as the global gateway between China and reliable financial-industry regulators has taken on new importance. This role becomes particularly significant with the merger boom in global stock exchanges. New York Stock Exchange's bid for Euronext (which comprises the Paris, Brussels, Amsterdam and Madrid exchanges) is not, like typical corporate mergers, merely about efficiency and strategy. They are especially about gaining access and diversifying regulatory jurisdictions. In this environment, Hong Kong's value can only go up.
Second, Hong Kong is taking a stronger role in China's development of a national capital market. A recent landmark deal illustrates this. For the first time a mainland bank, Industrial and Commercial Bank of China, plans to go public with a dual listing in Hong Kong (for $12 billion) and Shanghai (for $3 billion). Usually mainland firms list in Hong Kong and try a second listing later in the United States or Europe. What this dual Hong Kong-Shanghai listing shows is the strengthening of the mainland capital market as whole, with Shanghai tapping Hong Kong's greater wealth and global connectivity. Given China's rising economic power, these dual roles virtually ensure that the naysayers will continue to be wrong about Hong Kong, even if its erstwhile rival continues its rise as well.