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Keeping Pace in Greater China

An Institutional Investor Sponsored Report

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The folding of its securities into the MSCI Global Benchmark Equity Index is just one of many moments of recognition for the People’s Republic of China on its long global economic ascendance. Observers will be keeping eyes trained on Beijing for the next such milestone.

For the other markets in Greater China, there is no such air of inevitability — Taiwan, Hong Kong, and Macau must elbow their way into the spotlight through innovation, sound business strategizing, and supportive public policy. And yet these electrons encircling the nucleus formed by mainland China usually manage to do just that, seizing opportunities to participate in Beijing’s upward trajectory by involving themselves in a PRC-centered value chain.

In the case of Hong Kong, the city’s central role in financing and capital-raising across the region is both a hallmark and an ongoing reality. For example, in the three-year period from 2012 through most of 2015, Chinese companies raised USD$43 billion in initial public offerings in the Hong Kong market, versus just USD$25 billion on mainland exchanges, according to Dealogic. Hong Kong is also a gateway for investment flowing in and out of China — it accounted for two-thirds of foreign direct investment into China in 2014, way up from just 30 percent a decade earlier.

In land mass there is no comparison between Hong Kong and the Chinese mainland, and yet the World Investment Report for 2015, published by the UN Conference on Trade and Development, showed Hong Kong ranking second worldwide as a destination for foreign direct investment, behind only China. And the totals were quite close — USD$103 billion in cross-border investment flowed into Hong Kong, with the Chinese mainland registering inflows of USD$129 billion.

By including Chinese equities in the Global Benchmark Equity Index, MSCI was in a sense extending a process that commenced in 2014, when the Beijing government green-lighted the Hong Kong-Shanghai Stock Connect, which allows a total of USD$3.4 billion to flow between the two markets each day. and thus permits previously prohibited foreign ownership of Chinese securities. China doubled down on that bit of financial liberalization — again in a nod to its long-standing partner — when it initiated another USD$3.4 billion-a-day program on the same model, this one connecting Hong Kong to the stock market operating in the mainland city of Shenzhen.

Elsewhere in Greater China, Taiwan is viewed as having returned to the policy drawing board under new leadership. Among Taipei’s priorities is pursuit of trade strategies capable of delivering an economic boost comparable to what membership in the Trans-Pacific Partnership — always a longshot possibility — once seemed to promise. Dr. Ing-wen Tsai, first female president of Taiwan and trade-deal negotiator extraordinaire, came into office with a clear mandate to reignite growth.

Noted for the skill she demonstrated back in 2001, when she spearheaded Taiwan’s entry into the World Trade Organization, Dr. Tsai is intent now on fostering domestic innovation across an array of industries, meanwhile encouraging the world’s biggest markets to view Taiwan as a trading partner every bit as easy to deal with as South Korea, Japan, and other Asian nations.

To be highly valued as a trading partner it helps to have products and services in heavy demand. Government support for emerging or revitalized industries is thus an order of the day under Dr. Tsai, with no sector receiving more focus than green energy, according to a recent Brookings Institute report. By the year 2025, Taiwan’s nuclear plants, which currently supply 16 percent of all power generated — are targeted for phase-out, with renewables making up much of the difference. In Hong Kong, multi-year public construction projects are seldom in short supply — right now its portion of the Hong Kong-Zhuhai-Macau bridge project is particularly prominent. Expected to hit its 2018 deadline for completion, the structure will unite the two Special Administrative Regions of Hong Kong and Macau with the mainland city of Zhuhai, located in the southern Chinese province of Guandong. Described as one of the world’s longest bridges, it will make it possible for motorists to travel from Hong Kong to Macau or Zhuhai in a mere 30 minutes.

The skyscraper-studded city self-identifies as a model of urban infrastructure — that image is only underscored by Hong Kong’s current batch of improvements. A recent report stated that public construction projects would be the biggest line item in the government’s spending budget in 2018, accounting for over 18 percent of all outlays. Hospital and medical-center construction, already in progress, are part of the portfolio, as are a new sports stadium complex, multiple railway projects and other brick-and-mortar additions to the landscape.

It is also Hong Kong’s goal to become a center of aviation leasing in Asia. Tactics for achieving that aim include deploying tax incentives to companies that get involved, on both the operations and the financing side of the equation. With private aviation already enjoying a lengthy growth period, and with mainland China projected to need thousands of new aircraft over the coming decades, the initiative appears well-timed.

The timing is good for investment in either Hong Kong or Macau, at least from the perspective of stability. The prosaically named Basic Law that returned Hong Kong to China in 1997 after 170-plus years as a British colony — and in 1999 handed Macau over to China after 400-plus years under Portuguese rule — has now had two decades to prove itself and will stand for several more as the status quo. The legislation creating the Special Administrative Regions (SARs) of Hong Kong and Macau has 50-year terms stretching to 2047 and 2049, respectively, which suggests there’s a good 20 years or more likely to be free of any creeping doubts or confusion about what may occur as the sunset period arrives.

There’s a case to be made that the SAR legislation returning Macau to China in 1999 was no more impactful than the regulatory bombshell of two years later, which made gaming a competitive industry in Macau by ending the 40-year monopoly of Stanley Ho Hung-sun. The facility upgrade that resulted was immense and resulted in a boom period for Macau that transformed the city in dazzling fashion.

Average annual growth for Macau’s economy has been 7.75 percent in this century, although a rough patch occurred from 2014 to the middle of last year. GDP in 2014 was off 1.2 percent from a year earlier and then way off in 2015, down 21.5 percent, according to the country’s Statistics and Census Bureau. In the first half of 2016 there was a 9.7 percent drop, followed by positive GDP growth of 5.7 percent in the second half. A recent report by the International Monetary Fund showed a revised positive growth forecast for Macau in 2017 of 2.8 percent — IMF sees continued modest expansion for the economy in 2018.

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