Hong Kong must seize the opportunity to regain its finance hub status, KPMG says

Street view of Hong Kong.

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Hong Kong should seize the opportunity to regain its status as a global finance hub, leaning on its low tax regime and world-class talent that help the city serve as a bridge between mainland China and the rest of the world, KPMG said in a report.

Extended COVID-19 restrictions put the city on the back foot, but Hong Kong's unique set of attractions as an international finance center remain intact, KPMG said in its Hong Kong Banking Report 2023. Now that the city is "well and truly back to business," it needs to catch up in certain aspects.

"There is no doubt that the Hong Kong brand has been tarnished over the past few years. But this doesn’t mean that our reputation as a global financial hub has been irreparably damaged," KPMG said. "With some hard work and polish, the city's sheen should soon return."

Back in business

To lure investors back into the city, Hong Kong hosted a high-level banking summit in November 2022 and launched promotions to attract tourists, business travelers and investors. Still, the city has lost some talent to rival financial hubs such as Singapore and Dubai that were quicker to lift pandemic restrictions.

Hong Kong's economy contracted 3.5% in 2022 amid inflationary pressures and high interest rates, after expanding 6.4% in 2021. The city's banking sector registered moderate growth in 2022 with total assets of all licensed banks rising 2.5% to HK$23 trillion, according to the report.

While loans and advances fell 0.6%, deposits registered a 0.2% decline. A high rising interest rate environment helped boost the net interest margins of banks that operate in the city. According to KPMG, the aggregate net interest margin for in Hong Kong increased by 24 basis points in 2022 to 1.55%.

The high interest rate can help lenders improve profitability in 2023, but they must closely monitor and manage the credit risk of their loan portfolios, KPMG said.

Borders reopen

The reopening of the border between Hong Kong and the mainland has been a major boost for Chinese banks based in the city. Besides physical links, Chinese banks have been improving online connectivity. The lenders are working on digital wallets that can be used in all 11 Greater Bay Area cities to support cross-border business, KPMG said.

China's central government has made clear that it will continue to support Hong Kong's role as an international financial center and a financial hub, KPMG said. This commitment was reiterated in the report of the 20th National Congress of the Communist Party of China in October, it noted.

"In practical terms, evidence of this support for Hong Kong’s financial sector can be seen in the continuing enhancements to the cross-border investment schemes," it said.

Chinese banks in Hong Kong are working to build up their green finance framework and products including green deposits and loans. The Hong Kong subsidiaries can use transition finance to help high-carbon industries transition to low carbon business, provide green investment and financing services for Chinese companies, and develop tokenized green bonds, KPMG said.

To eliminate the uncertainty about what can be labeled as "green" or "sustainable," Hong Kong is working on a green taxonomy that will create a clear set of rules. Once the green taxonomy is released, it will likely give Chinese banks in Hong Kong more confidence to speed their development of sustainable products and services, KPMG said.

Hong Kong has committed to advancing its position as a hub for sustainable finance and environmental, social and governance, KPMG said. Banks in the city can take a lead in engaging with their clients on ESG, collaborating with service providers and becoming a guardian of data, it said.