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Hong Kong (HK) is a world-leading financial and business hub, and is arguably one of the world’s most open and highly competitive economies with an established international financial market. While a part of China since the transfer of sovereignty from the United Kingdom in 1997, Hong Kong largely operates as an independent region of China with a high degree of autonomy. operates as a capitalist service economy featuring low taxation, almost free port trade, and few barriers to business. As such, HK has been ranked as the freest economy in the world since 1994 according to the Index of Economic Freedom. This article will cover the financial system of Hong Kong, as well as a range of market information covering currency, futures, and stocks.
Although HK is merely half the size of Rhode Island (the smallest state in USA), this special administrative region is ranked the 35th largest economy in the world by nominal gross domestic product. The strength of its economy relies mainly on their services industry with financial services, real estate, professional and business services as the main contributors. As Hong Kong is a highly open and externally-oriented economy reliant on foreign trade and finance, it is technically vulnerable to a slowdown in the global economy or global financial market volatility.
show moreHong Kong benefits from a number of economic strengths, including: virtually no public debt, solid banking and legal systems, abundant forex reserves, a strict anti-corruption measures, and close ties with mainland China. As a result, Hong Kong has recovered well despite a downturn in economic growth in 2009. Subject to a global slowdown or unexpected market volatility, it is safe to say that Hong Kong’s market-driven economy will continue to thrive and remain stable for years to come.
Hong Kong is characterized by a high level of liquidity as well as effective, transparent regulations. Its financial system is governed by the Hong Kong Monetary Authority (HKMA), Hong Kong’s currency board and de-facto central bank. The HKMA’s primary objectives are to ensure the the financial stability of Hong Kong’s banking system as well as the Hong Kong Dollar (HKD).
Operated by The Hong Kong Exchanges and Clearing Limited (HKEX), the Stock Exchange of Hong Kong (SEHK) has operated in Hong Kong since 1891, over 120 years ago. With over 2,100 companies listed, the SEHK is the sixth largest stock exchange in the world with a market cap of approximately $3.7 trillion uSD (as at mid 2017).
Hong Kong’s financial services industry is known for being highly internationalized, modernized with rigorous listing regulations. Comparable to London and New York, SEHK is also considered one of the most active markets in the world for raising initial public offering (IPO) funds.
Many products are traded on the SEHK, including: ordinary shares, options, warrants, debt securities, unit trusts, Exchange Traded Funds (ETFs), Real Estate Investment Trusts (REITs), and much more. Apart from Hong Kong’s stock and futures market, Hong Kong also has an active over-the-counter (OTC) market which is primarily used by qualified financial institutions for trading forwards, options and swaps for stocks, interest rates, as well as currencies.
The Hong Kong Dollar (HKD) is the official currency of Hong Kong. As an actively traded Asian currency, the HKD is the 8th most traded currency in the world on a standalone basis. When traded against the US Dollar, the USD/HKD serves as the 11th most popularly traded currency pair on the market. The USD/HKD is an exotic currency pair which means the pair has lower trading volume, is more illiquid than major pairs, and usually attracts wider spreads. Additionally, low current interest rates in Hong Kong makes HKD pairs attractive to global carry traders.
Since the 1980s, the Hong Kong Dollar has remained pegged against the US Dollar at a rate of HK$7.80, regardless of Hong Kong’s underlying economic performance. Hong Kong interest rates are based on an automatic linked exchange rate system that maintains the stability of the exchange rate. As the HKD is fixed to a tight trading range by the HKMA, price movements tend to be limited and allow for a certain amount of predictability. For this reason, many beginners add the USD/HKD to their portfolio as a safe practice tool for training.
As the official currency of Hong Kong, the HKD breaks down into six denominations of HK$10, 20, 50, 100, 500 and 1,000. Each HK$ can be further subdivided into 100 cents. There are seven HKD coins which are 10, 5, 2, 1, 50 cents, 20 cents and 10 cents. Under the supervision of the HKMA, Hong Kong’s currency is issued by the government as well as three major local banks – Bank of China, Standard Chartered Bank and HSBC.
The primary monetary policy objective of the HKMA is to keep HKD exchange rates stable while keeping within the confines of the linked exchange rate system. The entire monetary base of HKD is effectively backed by the USD at the linked exchange rate. Hong Kong dollars can only be issued if there are equivalent US dollars on deposit held within Hong Kong’s exchange fund – one of the largest official cash reserves in the world.
As one of the most important financial centers in the world, the Hong Kong stock market has garnered the interest of international investors worldwide. Due to the strength of its financial system, Hong Kong managed to weather the storms of the 1997 Asian financial crisis, the 2000 internet bubble burst, the 2003 SARS outbreak, as well as the 2008 global financial crisis. Many benefits and risks are associated with investing in any stock market; and Hong Kong is no exception. Here is a list of benefits and risks for due consideration when it comes to investing in Hong Kong stocks:
Benefits:
Risks:
