BTN News: In July 1997, a significant shift occurred in the relationship between China and Europe: the British flag was lowered in Hong Kong for the last time, marking the end of its century-and-a-half-long status as a British colony. The city, once more part of China, has had its unique identity and customs forever shaped by its colonial past. This influence extends to its seven million residents, local economy, and daily interactions with Beijing.
For decades, Hong Kong thrived as a global financial and business hub, boasting a strong financial sector, a vibrant film industry, independent media, and even its own Disneyland. It was a beacon of Asia, a prime destination for international investors looking to tap into the region’s potential. However, recent years have been challenging for Hong Kong. The introduction of a new National Security Law in the summer of 2019 drastically altered the city’s landscape. The law extended significant influence to the courts of the People’s Republic of China, effectively ending the de facto administrative and political independence that Hong Kong had enjoyed.
Compounding these challenges, the COVID-19 pandemic struck amid a brewing trade war between the United States and China, coupled with Xi Jinping’s crackdown on technology firms. The results were stark: Hong Kong’s economy contracted in three of the past five years, and its stock market index, the Hang Seng, has been on a downward trajectory since 2018. Six years later, the situation remains precarious.
This scenario has understandably fueled concerns about Hong Kong’s economic future. Yet, as often happens in markets, investor pessimism may have gone too far. Despite its troubles, Hong Kong continues to serve as the gateway to mainland China, retaining its own currency pegged to the dollar, free from capital controls, and boasting minimal tariffs or trade restrictions. The city’s infrastructure remains world-class, and it continues to rank among the top four financial centers globally.
According to the consultancy PWC, Hong Kong’s tax system is still one of the most business-friendly in the world. For instance, the maximum marginal income tax rate in Hong Kong is just 17%, capital gains are not taxed, there is no wealth tax, and corporate taxation is highly competitive.
In addition to these benefits, Hong Kong’s integration with China provides unique opportunities, granting it privileged access to the world’s second-largest economy. This connection remains a significant advantage for Hong Kong-based companies, keeping the city a crucial reference point for millions of Chinese citizens.
Despite the turbulent past six years, during which the Hong Kong stock market lost nearly 50% of its value while the S&P 500 surged by almost 80%, the market now appears significantly undervalued. The Hong Kong stock market trades at a price-to-earnings ratio of just over eight times, nearly a third of the multiple at which the S&P 500 trades.
Many analysts believe this presents a classic case of markets overreacting to problems. Hong Kong remains a competitive enclave, and there is potential for its issues with China to begin clearing up soon. If this scenario unfolds, we might be looking at a significant market opportunity. All these details and more are discussed in the latest video from “If Only I Had Known.”
In conclusion, while Hong Kong has faced considerable challenges in recent years, its fundamental strengths remain intact. Its strategic position as a gateway to China, robust infrastructure, and favorable tax environment continue to make it an attractive destination for investors. The current undervaluation of its stock market may indeed represent a significant opportunity for those willing to look beyond the immediate uncertainties.
