FX liquidity has no future in Hong Kong whilst London stands tall

FX liquidity will always be solely centered in regions of political stability, an important factor that has been demonstrated by the established and pragmatic nature of the world’s largest Tier 1 FX dealers which are located in nations with sophisticated business environments and unfaltering financial markets infrastructure that dates back to before the industrial revolution.

A cursory glance at a map would show giant continents with absolutely no diversified industry base, no capital markets sector, no ability to attract and retail global talent or leadership and no technological modernity, and a quick correlation between the lack thereof and the policial and social structures of those nations could easily be made.

Ever since the British empire took a lease from China on Hong Kong, the small but very highly developed ‘New York of the Far East’ had benefited from over 100 years of imperial development, giving rise to a vast and powerful financial sector which modeled that of London, and Tier 1 banks founded specifically for the purposes of international trade and globalizing the capital markets sector came to fruition.

HSBC is exactly that. It was founded by British colonialists in London, Hong Kong and Shanghai, and is one of the largest and most well funded financial institutions in the world. As of the end of last year, HSBC was the 8th larges FX dealer in the world, and the bank is responsible for the official minting of Hong Kong dollar notes along with South African commonwealth bank Standard Chartered, itself a major force in Hong Kong and also a product of British colonialism.

The structure of Anglicization in Hong Kong had facilitated an absolutely ideal environment in which HSBC and Standard Chartered could execute interbank FX trades for liquidity takers in the Asia Pacific region, and as a result of its vast imperial strength and organized political environment which resembled that of a Western nation, the entire region’s corporates placed limitless trust in Hong Kong as the place to do business in the region, effectively bringing London to the shores of the South China Sea, creating synergy and reducing latency.

Today, however, many challenges face the banks and their very own reluctance to extend counterparty credit to OTC derivatives firms whilst insisting on $50 million balance sheets and ensuring that last look execution is an instrumental part of their single dealer platforms has led to non bank market makers who are fully averse with our business to take the market share. XTX Markets, for example, is now the number one FX dealer in the world in terms of market share.

Thus, banks are already facing a less monopolised environment than they did even 5 years ago, however with Hong Kong now under a massive political stand off between residents and the mighty Chinese Communist Party, its standing as an interbank giant for the Far East is on borrowed time.

Communism and global trade do not mix, and never have. China may well be a commercial superpower, but it is a domestic commercial superpower that internalizes everything and exports via government-operated structures whilst the internal structure of the country is dominated by a totalitarian government which blocks absolutely everything that is not Chinese. 

The nation’s financial system is only available to Chinese companies and individuals and is owned by the state. Ever tried to use a Mastercard or Visa to pay for something in Zhengzhou or Xi’an? Ever seen a product in China that was not made in China by a company with a 20% or more government stake?

This is how communism works, however China has been extremely clever at engineering a specialist revolution of communism which allows the nation to be controlled entirely by central government whilst empowering its population via government purchasing power and extremely educated talent bases.

That is all very well, but it is the antithesis of international free trade, and now Hong Kong, once the most liberated region with a comprehensive business structure, is likely to become far more ensconced in communist Chinese policy than it ever has been.

A Special Administrative Region (SAR) of China since 1997 when the lease to Britain expired and Chris Patton packed his bags, China has invested tremendously in development and building in Hong Kong, however the mainland’s government had left it alone in terms of culture and business, albeit on a strictly supervised level.

Now, however, policy is heading far more toward the integration of Hong Kong into the communist system, which means there is little future for its current standing.

HSBC and Standard Chartered have weighed into the turmoil in Hong Kong today after calling for a peaceful resolution following several months of mass demonstrations.

Both banking giants have taken out newspaper adverts in Hong Kong to urge an end to the violent clashes between police and protesters, which were sparked earlier this summer by a now-suspended controversial extradition bill.

The standoff between authorities and protesters has rocked parts of the region’s economy, which is home to some of the world’s biggest financial and business groups.

This is the ethos of fear, as it is clear that both HSBC and Standard Chartered would struggle tremendously to operate their current methods under communism.

Just last month, both banks’ retail operations in Hong Kong had been disrupted by the violent unrest that is occurring between public and government.

FinanceFeeds reported that HSBC had stated on its website that the HSBC Pacific Place Premier Centre and Pacific Place Day & Night Plus is closed from 12 noon on June 12, 2019 until further notice due to public events. HSBC customers who required to use HSBC’s banking services during the period at Admiralty were advised to visit the Hay Wah Building Branch and Premier Centre, or to use the Bank’s personal internet banking, mobile banking or phone banking.

At the same time Standard Chartered Hong Kong temporarily suspended branch operations in Admiralty until further notice due to traffic disruption. The aim is to ensure safety of staff and customers. The bank has suspended the operations of the two branches in Admiralty due to severe traffic disruption in the area. Banking services in Admiralty district, including branch services, cheque deposit service, ATMs and cash and deposit machines, were temporarily suspended until further notice.

This is not the first time that banks had done this. Both entities did the same during the last session of unrest four years ago.

HSBC, which stands for Hong Kong and Shanghai Banking Corporation, said in an advert this morning: “We are deeply concerned about recent events in Hong Kong. We strongly condemn violence of any kind and the disruption caused to the communities in which our customers, staff and shareholders live.”

The bank, which was founded in Hong Kong more than 150 years ago, said that maintaining the rule of law was “essential to Hong Kong’s unique status as an international financial centre”.

The HSBC advert was published in Chinese in five newspapers.

Standard Chartered also added its voice to the calls for peace, saying in three newspaper adverts: “We strongly support ‘one country, two systems’, and support the SAR [Special Administrative Region] government in effectively maintaining social stability and safety.”

The messages were echoed by Hong Kong-based Bank of East Asia (BEA), which posted a 75 per cent drop in profits yesterday after writing down property loans in China.

By contrast Singapore, the world’s third largest financial center, is so well ordered that even a stray paper napkin will not find its way onto the street in error. The governance of the small island nation is so strong and so well backed that institutions from China, India, Britain, America, Australia and Malaysia operate their entire APAC divisions from within Singapore at interbank level. By 2013, Singapore had become Asia’s largest interbank FX center, and has never been the subject of fiscal or political opposing forces.

Singapore is indeed a dictatorship, but it is not one which is part of a global communist superpower and its interest is in keeping full transparency and attracting global business. Today, all of the APAC fintechs and interbank dealing take place in Singapore.

This leaves London to operate the same banks from the banks of the river Thames at Canary Wharf, in a free market economy which is about to break free of the socialist grip of the European Union and has a 400 year tradition of capital markets dominance.

Capitalism, after all, was invented in London.

With modern commercial VPS solutions and globalized hosting via companies such as Equinix, London’s interbank center is the even keel that APAC’s liquidity takers will now look toward.