Hong Kong’s role as China’s window to the world of unfettered capitalism is highlighted by its massive investment in Australia, where it is the fifth largest source of foreign capital.

Hong Kong investors own nearly $120 billion ^[1] in Australian assets, or almost double the holdings of Chinese investors, and ranking only behind the United States, the United Kingdom, Belgium (representing a large proportion of EU investment) and Japan.

The Hong Kong stake has been rising rapidly, increasing 87% over the past five years which is faster than any of the other top 10 investors in Australia. China’s investment in Australia has risen by only 28% in that time.

Hong Kong companies have about $16 billion in direct investment in Australia, with the traditional conglomerates that have dominated the Hong Kong economy for many decades having significant assets. CKI Infrastructure Holdings, which is part of billionaire Li Ka-shing’s legendary empire, owns a large slice of Australia’s electricity assets.

However, Hong Kong’s investment in Australia is dominated by its funds managers and banks, with ‘portfolio’ holdings, such as investments in the share and bond markets, accounting for more than half of its total holdings.

It is likely that helping to bankroll the Australian government’s budget deficit has been the big attraction. Total Hong Kong holdings of Australian bonds (both public and private sector) have shot up 111% in the last five years to $47 billion.

The Australian Bureau of Statistics shows Chinese investors held only $1.5 billion in Australian debt securities at the end of last year, but it’s likely that a large share of the Hong Kong stake has been purchased on behalf of the Chinese government and other investors.

China uses Hong Kong to channel its investments around the world and a large share of the capital that flows into China goes through the Hong Kong financial system.

While Hong Kong residents value their separation from the Chinese state, the International Monetary Fund says Hong Kong is increasingly integrated into the Chinese economy. The IMF has done the numbers on China’s concept of a ‘Greater Bay Area ^[2]’, encompassing Hong Kong, Macau and the nine major cities of China’s Guangdong province, showing it makes up an economy with a population of 70 million and has a GDP of US$1.5 trillion—about the same as Australia’s.

It’s just 27 kilometres from Hong Kong to China’s booming technology hub at Shenzhen, with the trip taking around 15 minutes in a Chinese bullet train. Hong Kong’s integration into China’s infrastructure advanced further last year with the (long-delayed) opening of the world’s longest sea bridge ^[3] across the Pearl River delta to Macau and Zhuhai prefecture.

However, it’s the financial linkage underwritten by British common law and a reputation for transparent and honest regulation that gives Hong Kong an importance to the Chinese economy that far outstrips its relative size (its population is 7.4 million).

The US Heritage Foundation has placed Hong Kong at the top of its global economic freedom ranking ^[4] for each of the last 25 years, praising its management of trade, monetary policy and government integrity. ‘A high-quality legal framework provides effective protection of property rights and strongly supports the rule of law,’ it says.

Under the ‘one country, two systems’ agreement struck with the United Kingdom in 1997, Hong Kong will keep its legislative and legal systems as well as its own currency and capitalist economy until 2047.

The Hong Kong Monetary Authority—its de facto central bank—and its corporate regulator, the Securities and Futures Commission, have a good standing globally.

More than 1,500 multinational companies have chosen Hong Kong as the base for their regional headquarters. About 60% of foreign investment in China and a similar share of its outbound investment is channelled through Hong Kong.

The total stock of Chinese direct investment in Hong Kong is US$620 billion, about 70% more than Hong Kong’s GDP. A large share of that is reinvested in markets around the world on China’s behalf, including in Australia.

Hong Kong’s funds management industry is ballooning in size. Its assets have risen from US$2.3 trillion to US$4.0 trillion since 2016, almost double the size of Australia’s managed funds (including superannuation).

Chinese companies use Hong Kong to raise capital. The IMF records that mainland companies raised US$47 billion in equity and US$66 billion in bonds on the Hong Kong market in 2017.

About 420 mainland companies are listed on the Hong Kong Stock Exchange with a combined market value of US$1.5 trillion. This includes about 50 of the largest Chinese state-owned enterprises.

Analysis ^[5] by the Peterson Institute for International Economics found Hong Kong’s lack of capital controls and greater international exposure makes it a desirable base for the global expansion of Chinese companies.

Listing is faster and easier in Hong Kong than on mainland exchanges, while its financial infrastructure lowers operating costs. Its regulatory structure focusses on prudent minimum standards and transparency.

‘Neither Shanghai nor Shenzhen is likely to win this competition with Hong Kong, at least over the short term,’ the PIIE said.

Hong Kong’s financial centre has also been critical to China’s plans for building the renminbi as an international currency. The pool of RMB deposits in Hong Kong is approaching the equivalent of US$100 billion.

Some observers contend that Hong Kong’s value to China as a financial centre is so great that it would not imperil it by sending its own police or military into the territory to put a halt to the protests there. ‘Putting these protests down with the army would not reinforce China’s stability and prosperity. It would jeopardise them,’ The Economist editorialised ^[6] this week.

However, it’s also possible that China would see the protests themselves as endangering the territory’s financial standing, particularly if critical infrastructure such as Hong Kong’s airport is threatened.