Hong Kong might have lost much importance as a gateway to mainland China, for the financial markets Beijing still needs a stable Hong Kong, says financial analyst Victor Shih in NTD. The reason Chinese entities are borrowing through Hong Kong is that the financial institutions around the world, including the International Monetary Fund, legally treat Hong Kong as a separate entity, he said.
Chinese companies use Hong Kong’s capital markets to attract foreign investors, while international companies use the city as a base to expand into mainland China. Experts warn that Beijing would shoot itself in the foot if it takes an increasingly hard line against protestors, seriously damaging Hong Kong’s standing as a stable financial center.
There’s $3 trillion in dollar-denominated debt issued by Chinese companies, according to estimates. And Hong Kong, an important source of capital for China, provides roughly a trillion dollars of that amount, according to Victor Shih, a professor of political economy at the University of California–San Diego School of Global Policy and Strategy.
U.S. banks and investors have lent roughly $180 billion to Chinese banks and Chinese companies mainly through Hong Kong, Shih said in his testimony at a congressional hearing held by the U.S.–China Economic and Security Review Commission on Sept. 4.
U.S.-based pension and mutual funds also own additional billions in bonds issued by Chinese entities, he said.
“When you’re in debt to the tune of $3 trillion, you don’t want your creditors to suddenly compress your credit limit by $1 trillion,” Shih said at the hearing. “That would be a big problem for China. And I think that may be one of the reasons why China thus far has chosen, I would call it, a very moderate and soft-line approach in Hong Kong.”
The reason Chinese entities are borrowing through Hong Kong is that the financial institutions around the world, including the International Monetary Fund, legally treat Hong Kong as a separate entity, he said.
The debts are issued by the subsidiaries of Chinese companies headquartered in Hong Kong, allowing them to enjoy lower interest rates compared to debt issued in mainland China.
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