How China is tightening its grip on Hong Kong's economy

China is not only tightening its political grip on Hong Kong to rein in the restive city, it’s pushing harder to deepen its influence over the international finance hub’s business life.

From real estate to initial public offerings, debt issuance and telecommunications, mainland Chinese companies — many of which have government backing — are playing increasingly assertive roles in almost every corner of the city. It’s a shift that has been in progress since the handover in 1997.

While supporters of greater economic integration point to the growth-boosting impact of Chinese investment in Hong Kong, critics see it as yet another reflection of the city’s diminishing autonomy from the mainland. That concern has swelled in recent weeks after China said it would impose contentious national security legislation on Hong Kong, threatening the independence of a judicial system that has been a key draw for international companies and investors.

Take something as simple as offices. While the numbers of outposts for Japanese or U.S. companies has stayed broadly static over the past five years, the number of mainland Chinese companies with a foot on the ground has soared.

As mainland Chinese companies are expanding, concern over the city’s future is growing among western companies. Over a quarter of companies questioned by the American Chamber of Commerce in Hong Kong this month said they were considering moving elsewhere. Nearly 40% of respondents said they were considering relocating personally as China pushes forward with a contentious new national security law that is seen eroding Hong Kong’s legal framework.

It’s also the case that these new mainland China offices are having a growing impact. Among the industries that have ramped up their presence are China’s state-backed brokerage houses, asset management companies and banks.

They’re increasingly arranging and buying offshore debt deals for the nation’s firms — displacing international firms in the city from the lucrative deals.

China’s offshore syndicated loan market is also become more and more dominated by the nation’s lenders, with Bank of China Ltd. catching second place last year after HSBC Holdings Plc. The proportion of total loan volume for Chinese companies provided by China’s financial institutions jumped to 48.5% in 2019 from 28.5% four years earlier.

A similar picture can be spotted for initial public offerings. More money was raised in Hong Kong than in New York last year, though it was mainly from mainland Chinese firms, with the Asian unit of Anheuser-Busch InBev NV a notable outlier.

And it’s been the Chinese banks that have expanded their market share in recent years, squeezing fees and putting pressure on their western rivals.

Things are also changing in the demographic makeup of the city. Immigrants into Hong Kong from mainland China have outstripped their international counterparts and are a key reason for the city’s population growth. This year, of course, that has slowed by the COVID-19 outbreak.

While Hong Kong’s role as a Chinese fund-raising center is being strengthened, a status that’s likely to gain further momentum during the current standoff with the U.S., its share in the nation’s economic activity is far diminished. China has gradually been growing less reliant on Hong Kong as a source of growth as mainland cities such as Shenzhen have grown.