FT SPECIAL REPORT

Doing Business in Hong KongMonday November 18 2013 www.ft.com/reports | @ftreports

One of the traditional pas-times in Hong Kong is wor-rying out loud aboutwhether the Chinese terri-tory is losing ground to

Singapore as a global financial centre.But recently, Singapore has been

shunted out of the conversation infavour of Shanghai, mainland China’sfinancial capital. Everyone from LiKa-shing, Asia’s richest man, to din-ers at local restaurants, are asking ifthe newly unveiled Shanghai free-trade zone will eventually eat HongKong’s lunch.

Whether the Shanghai project willbecome the capital markets equiva-lent of Shenzhen – the special zonecreated by Deng Xiaoping to launcheconomic reforms three decades ago –is impossible to tell, as details remainvague. Even John Tsang, Hong Kong’s

financial secretary, says he is unclear.“I think you’re probably in a better

position to tell me what you think theShanghai free-trade zone is,” MrTsang jokes. “But . . . any time thatChina opens up a bit and liberalisescertain parts of the country, or bringsin a new reform that serves to openup the market a bit, it must be goodfor Hong Kong.”

Many people less sanguine than MrTsang still believe that the zone isunlikely to pose a near-term chal-lenge, partly because of the strengthand independence of Hong Kong’slegal system.

But the undercurrent of concernpoints to mounting anxiety in HongKong about the future of the formerBritish colony as it moves towardsfull integration with mainland Chinain 2047. With low personal tax rates

and an enviable unemployment rateof 3.3 per cent, Hong Kong remains anattractive place to work, particularlyfor European expats drawn to thedynamism of China that is missing athome.

But the territory is grappling with ahost of problems – everything frompoor air quality and sky-high propertyprices to a growing gap between richand poor – that pose challenges for itscompetitiveness. “People open to an

international move tend to be black orwhite on coming to Hong Kong,” saysRichard Boden, a senior headhunterat Heidrick & Struggles.

“They either say ‘hell yes’ or say‘no’ for a variety of reasons, mostly todo with flat size, a lack of schoolplaces and air quality.”

The labour market is also changingin ways that benefit some groups atthe expense of others, and particu-larly professional locals who are hav-ing increasing trouble finding jobswith high enough salaries to pay therent. “A lot of people say that in themost lucrative banking sector, HongKongers are losing jobs to the Zhangsand the Wangs who are US-educated,UK-educated, says Regina Ip, head ofthe New People’s party, referring tocommon surnames in mainlandChina. “There’s a sense of being

encroached on, losing competitiveness– almost a rising identity crisis.”

Alex Trott, a managing director atthe consultancy Accenture, says thatwestern expatriates who do not havemainland China Rolodexes are alsofacing more competition in HongKong, although he believes there arestill not enough mainland Chinesewith the experience that US and Euro-pean financial institutions demand.

Hong Kong is also facing headwindsfrom the relative economic slowdownin China, which has hurt trade – ahuge component of the territory’seconomy – and financial deal flows.

The territory cemented its reputa-tion as a key financial centre for Chi-na-related deals in 2009 when itjumped to the top of the global league

Continued on Page 3

Headwindshamper thesearch for anew identityThe former colony is still an attractive placetowork, but it is grapplingwith a numberof problems, reportsDemetri Sevastopulo Reflecting opinion: protesters march in opposition to the government’s decision to refuse a licence to HKTV Getty

Some experts havesuggested that theterritory peg its currencyto the renminbi

Niche lendersFamily-ownedbanks representlikely target for thebig groupsPage 2

Inside »

Cultural shifttowards artArtistic processstarts to showsigns of maturityPage 2

Room serviceIn a hectic propertymarket, even carspaces can fetcha million dollarsPage 3

Running – abig businessExecutives arehitting the trail ofultra fitnessPage 4

Mutual appealFund managementrole offershope of greaterrecognitionPage 4

In the run-up to the launchof the Shanghai free-tradezone, Li Ka-shing, HongKong’s richest tycoon,sparked a debate by sayingthat China’s growingengagement with the worldwould have a significantlong-term impact on HongKong’s competitiveness.

Beijing had initiallypledged to use the zone, a29 sq km area that includesShanghai’s port, as a test-ing ground for reformingthe country’s inefficientfinancial sector, and par-tially liberalising shippingand legal industries, as wellas various cultural services.

Immediately, a widerange of foreign companies,ranging from video-gamemakers Nintendo and Sony,to the London MetalsExchange and global artauction houses, beganexpressing visible enthusi-asm.

Possibilities include two-way cross-border in-vest-ments in stocks and bonds,experimentation with bank-ing deposit rates deter-mined by the market, acrude oil futures tradingcentre allowing domesticand foreign investors toparticipate in OTC deriva-tives, and issuance of bondsfrom offshore holding com-panies with subsidiaries inthe free-trade zone.

Yet, for all the conjecture,Hong Kong has little toworry about.

Observers have been dis-appointed by the lack ofdetailed guidelines for thefree-trade zone.

Contrary to expectations,corporate tax rates in thezone were held at 25 percent, as in the rest of China,compared with 15 per centin Hong Kong.

Meanwhile, a “negativelist” was issued – similar inconcept to the US’s mootedTrans-Pacific Partnershipagreement – which slapsmore than 200 restrictions

on investments in 18 indus-tries, including media andpublishing, real estate, andtelecommunications.

Hong Kong’s economiclifeline revolves aroundindustries such as finance,shipping and professionalservices. There is little tosuggest that Shanghaiposes a serious near-termthreat to any of these.

So far, 36 enterpriseshave been granted licencesin the zone, including eightlocal banks and two foreignbanks: Citibank and DBS.

Yet investment, at lessthan $1bn, has under-whelmed expectations, andthere is hardly any com-mercial incentive for bigmultinationals to set upregional headquarters inthe zone.

For now, China has notopted to use the zone as atesting ground for greatercapital account and interestrate liberalisation, or freerrenminbi convertibility, soHong Kong’s role as China’sprime offshore renminbicentre seems secure.

As a shipment hub forChinese goods, Hong Kongdoes face significant compe-tition from China. But it isthe Pearl River Delta, notShanghai, that poses thebiggest threat.

Hong Kong’s terminalhandling charges aremuch higher than those inGuangdong’s Shekou andYantian ports, where capac-ity is underutilised. AllChina-bound goods that go

through Hong Kong areported inefficiently by truckor barge to their final des-tination, yet easier shippingin Shanghai is unlikely toaffect Hong Kong signifi-cantly.

More likely, the zonewould pose a greater threatto international shippinghubs closer to Shanghai,such as Kaohsiung, Kee-lung and Busan, accordingto a senior shipping indus-try expert.

Until more detailed andrevised regulations govern-ing the zone are announced

– possibly by early nextyear after this month’sCommunist party Third Ple-num – all analyses of thezone’s significance remainspeculative.

Even before it is clearhow things are going towork inside the Shanghaizone, other cities such asTianjin, Qingdao andWuhan have started peti-tioning the central govern-ment to set up their ownfree-trade zones.

Guangdong provincialofficials are reportedly

interested in convertingexisting special economiczones such as Qianhai, nearHong Kong, into fullyfledged free-trade zones.

Yet even if the promisedliberalisation of Shanghaidoes come to pass, HongKong might still be betteroff. Danny Po, Asia-Pacificand China National Leaderof M&A Tax Services atDeloitte, says at least 10 percent of all bank deposits inHong Kong are yuan-denominated.

“We need a mechanism tochannel this idle moneyinto productive invest-ment,” he says.

“Eventually,” he says, “ifsome degree of capitalaccount liberalisation oradministrative simplifica-tion is allowed in the zone,Hong Kong companies willbe in a good position toredeploy renminbi depositsto finance capital invest-ment, merger and acquisi-tion transactions, or inter-national trade.”

Many also conclude that,despite recent disappoint-ments in Shanghai, thereare some encouraging signsfor investors.

“It is clear that the ‘nega-tive list’ needs to be short-ened”, says ChristopherHui, vice-president of theMainland Developmentdepartment at the HongKong Exchange.

“In the past, the centralgovernment employed astrictly top-down approachto any revisions to regula-tion.

“But the main shift hereis that regulators are nowurging the business worldto offer ideas and solutions,and set the pace of revisingthe negative list.

“If this materialises, thereis no question that HongKong will, very simply, bea net beneficiary of a moreopen China”.

John Tsang, Hong Kong’sfinancial secretary, appearsto agree. “When Chinaopens up, we are the firstones to take advantage ofthat. So that must be goodfor Hong Kong,” he says.

“And I’m sure, in terms ofthat new free-trade area,whatever you call it, themajority of the business isgoing to be based in HongKong.”

Benefits likely to flow fromliberalisation in ShanghaiCompetition

The free-trade zoneis an opportunityrather than a threat,says Gavin Bowring

Hong Kong’s rivals are in the Pearl Delta Bloomberg

Observers havebeen disappointedby a lack of detailedguidelines for thefree-trade zone

2 ★ FINANCIAL TIMES MONDAY NOVEMBER 18 2013

The four remaining inde-pendent banks in HongKong are pretty small, yetevery now and then, theygenerate a storm of interna-tional interest.

Now is one of those times.It is not their size that

matters, but that there areonly a handful.

A Hong Kong bankinglicence is not an easy thingto come by and, moreimportantly, the city offersa bridge between China andthe rest of the world’sfinancial markets that isattractive to institutionsboth on and away from themainland.

“Clearly, there is going tobe demand for and interestin these banks,” says PaulMcSheaffrey, head of bank-ing at KPMG in Hong Kong.“They are the obvious tar-get for Chinese and foreignplayers – it really comesdown to price.”

Between them, the fourhad outstanding loans ofHK$655bn ($84bn) to cus-tomers on the island at theend of 2012. This is abouttwo-thirds of the loans onthe books of Bank ofChina’s Hong Kong branchalone and slightly morethan one-quarter of thosemade by HSBC, accordingto KPMG.

What is more, most ofthose loans come from justone of the four independ-ents, Bank of East Asia(BEA), the other threeaccount for just HK$250bn.

The very smallest of theindependents, Chong Hing,looks set to be sold to YueXiu Group, the investmentarm of the Guangzhou localgovernment, after its con-trolling family shareholdersagreed to sell their majoritystake.

Wing Hang, the secondlargest by assets after BEA,told investors in the sum-mer that it had beenapproached about sellingtheir stake.

ANZ of Australia andOCBC and UOB of Singa-pore are among thosereported to be interested.

Lastly, the family thatcontrols Dah Sing, has alsosaid it would be happy tosell at the right price.

Only BEA, run by SirDavid Li, seems determinedto continue to stay inde-pendent – and has strongbacking from three big for-eign shareholders, Caixa-bank of Spain, Guoco Man-agement, part of the Malay-sian Hong Leong empire,and Sumitomo of Japan.

BEA is better positionedthan the others, not justbecause it is much larger,but more importantlybecause it has spent morethan a decade buildinga branch network in main-land China.

These attributes make itboth more attractive as atarget and more able tostand on its own feet.

DBS of Singapore boughtDao Heng in Hong Kong in2001 – for more than three-times book value – to tryand make more headway inChina. But, more than a

decade later, it still makesonly the tiniest sliver of itsprofits from mainland busi-ness, according to analystsat CLSA.

This deal remains a warn-ing for foreign bidders hop-ing to use Hong Kong as aspringboard into China.

The last deal for a HongKong bank was the take-over of Wing Lung byChina Merchants Bank, alsofor more than three timesbook value, which has simi-larly not made much head-way in expanding its main-land business.

However, Wing Lung hasmanaged to increase its off-shore lending to Chinesecompanies sharply, whichis perhaps the more impor-tant factor.

Chinese companies haveincreasingly come to HongKong for loans since theend of China’s multi-tril-lion-dollar bank-led stimu-lus package during thewestern financial crisis.

Since 2009, Hong Konglending to Chinese compa-nies has increased fromabout HK$700m to morethan HK$3bn, according toCitigroup.

Fitch, the rating agency,calculates that banks’ grossexposure to mainland Chinais now 31 per cent of assets,up from 11 per cent at theend of 2009.

Chikako Horiuchi ofFitch’s financial institu-tions group says: “Cross-border financial links havecemented, with growingloan demand in Chinafinanced by Hong Kong-based banks. This develop-ment reflects tighteningmonetary conditions on themainland.”

Some expect Yue Xiu’s

ownership of Chong Hing –if the deal is completed – tohave some policy role interms of ensuring financeflows to Guangzhou compa-nies.

Ultimately, the last fourfamily-controlled HongKong banks will struggle tosurvive independentlybecause of the higher costsof business in everythingfrom regulatory compli-ance, staffing and capital,according to AlisonKennedy, a financial serv-ices consultant at Accen-ture.

Competition from main-land-owned institutionssuch as Bank of China hasalso become more intensein recent years and thatwill continue as ICBC Asiaand others make moreheadway in the city.

Banks from elsewhere insoutheast Asia have beenlooking at the Hong Konglenders, but mainland buy-ers are likely to pay thehighest premium, MsKennedy adds.

“You should also watchfor non-bank bidders fromthe mainland who want toexpand into consumer-focused financial services,such as retailers and espe-cially insurers,” she says.

“In five years, I don’tthink there will be anyfamily-controlled banks inHong Kong.”

Niche groupsoffer entréeto mainlandBanking

Small family-ownedinstitutions areunlikely to maintaintheir independence,writes Paul J Davies

‘They are theobvious targetfor Chinese andforeign players’

When Beijing residents visitHong Kong, they sometimesquip that the territory islike a breath of fresh air,especially in winter whenthe Chinese capital can bebathed in extremely hazard-ous smog for days on end.

While most Hong Kongerscan understand that feeling– having seen countlessimages of mainland citieswrapped in smog – they arefar from happy with theirown air quality.

According to the HedleyEnvironmental Index, com-piled by the University ofHong Kong, the territoryhad 69 clear days – whenthe levels of five pollutantscomplied with World HealthOrganisation guidelines –last year. The pollution costthe economy an estimated

HKD40bn ($5bn) in health-care costs and lost produc-tivity.

“Our air quality could bemuch better . . . and that’swhat we are striving for,”says Christine Loh, an envi-ronmental activist whobecame Hong Kong’s under-secretary for the environ-ment about a year ago.

While the pollution hasthe greatest effect on HongKong’s 7m citizens, the gov-ernment is also worriedabout the effect on theformer British colony’s abil-ity to retain foreign busi-ness and remain a keyfinancial capital.

According to the HongKong General Chamber ofCommerce’s survey of busi-ness prospects for 2013 –released in 2012 – about40 per cent of respondentssaid the government wasdoing a “poor” job tacklingthe air quality issue, whileanother 50 per cent said itsperformance was “average”.

David O’Rear, the chiefeconomist at the chamber,says that, while companiescomplain about air quality,there does not appear to bemuch effect on business.

But others, includingrecruitment groups, say thepollution can influencepeople’s decision whether tomove to Hong Kong.

“A major factor iswhether they have chil-dren” says Richard Boden,a principal at Heidrick &Struggles, the executivesearch firm. “People arewilling to put themselvesthrough the pollution but,when children are involved,preconceptions about theseverity of the pollution canbe difficult to overcome.”

But he adds that pollutionin Beijing and Shanghaitends to help Hong Kongbecause, by comparison,its air was of reasonablequality.

While the governmenthas received poor marks forits handling of the environ-ment, this year it unveileda new “clean air plan” thathas received generally posi-tive reviews. Regina Ip,head of the New People’sparty, says the governmentshould be applauded.

“To the foreign commu-nity, there are two keyissues, air quality and inter-national school places,”

says Mrs Ip. “On air qual-ity, the government is actu-ally doing a lot . . . I thinkwe should be seeingimprovements slowly. Natu-rally, the exogenous factor,air from the Pearl RiverDelta, we can’t control.”

Ms Loh, who has beeninstrumental in pushing thenew environmental meas-ures, says Hong Kong facesseveral hard challenges thatneed to be addressed toreduce the health burdenon the population.

Hong Kong suffers fromhigh background pollution

– much of which emanatesfrom the manufacturingregion of the Pearl RiverDelta across the border inGuangdong – in addition tohigh roadside pollution.

“In the densest urbanareas, we have a street can-yon trapping effect so, evenwhen we have better orlower pollution in the ambi-ent air, at roadside it’shighly undesirable everyday,” says Mr Loh.

The government is settingaside US$1.5bn to helpreplace of 80,000 of the120,000 diesel vehicles inHong Kong and to fit busesand taxis with devices tohelp reduce their emissionsof nitrogen dioxide andnitric oxide.

The territory also inhaleshigh emissions from cargoships, a particular chal-lenge because the port – thethird-largest container portin the world – is close to adensely populated part ofthe city across the harbourin the New Territories.

To tackle the problem,the government is poised tobring in legislation to forcecargo ships and otherocean-going vessels to

switch to a cleaner fuelwith lower sulphur contentwhen they berth in VictoriaHarbour.

Hong Kong is also work-ing with Guangdong,including Shenzhen whichhas the second-largest con-tainer port on the main-land, to get mainlandauthorities to frame regula-tions that would requireships to use cleaner fuel –something that ships arealready required to do inthe US and Europe.

“We’ve talked about thisto our regional neigh-bours,” said Ms Loh, “andwe’ve talked to the nationalauthorities [in mainlandChina], so, in a way, we arepromoting an idea with alarger vision.”

Ms Loh says that theHong Kong business com-munity is supportive of themeasures that the govern-ment is taking.

Alex Trott, who is thehead of Accenture’s finan-cial services practice inHong Kong, thinks the juryis out: “There has been alot of discussion, but thequestion is how quicklyaction can be taken.”

Air quality blighted by fumes from road and sea

Visitors to the West Kowloonwaterfront promenade thisJune will have been greetedby a large heap of excre-ment. But this was not the

result of some careless dog walker,rather a 110-foot long piece of installa-tion art created by Los Angeles artistPaul McCarthy – and it was whatthousands of people had come to see.

The inflatable sculpture, entitled “AComplex Pile”, sat beside a giant roastpig, a pair of legs, and a bouncyStonehenge, all part of a show called“Inflation!”.

Over six weeks, the air-filled exhib-its attracted more than 150,000 visi-tors, and heralded the arrival of thepublicly funded museum M+ on toHong Kong’s art scene.

“More important than the visitornumbers is that it started a debateabout what art is,” says MichaelLynch, chief executive of the WestKowloon Cultural District, an artsand entertainment development areacovering 40 hectares in the heart ofHong Kong harbour. “To start a dis-course is an incredibly important partof what we’re doing.”

M+ is the centrepiece of the multi-billion-dollar West Kowloon project.Once open in 2017, many hope it willhelp cement Hong Kong’s place as atruly global player in the art world,rather than just as the Asian base forart auctions.

Architects Herzog & de Meuron –best known for designing Beijing’sBird’s Nest Olympic Stadium – werechosen this year to design the perma-nent M+ structure, which will sit atthe foot of Hong Kong’s tallest build-ing. The finished space of about 60,000square metres will be on a par withLondon’s Tate Modern, and NewYork’s MoMA.

Collector Uli Sigg has donated morethan 1,400 contemporary Chinese art-works, including works by some ofChina’s best-known artists, such as AiWeiwei and Zeng Fanzhi.

With the opening of M+, along with16 other venues that make up theWest Kowloon Cultural District, MrLynch hopes to bring a “rebalancing”of Hong Kong’s art scene away frompure commercial considerations. “It’s

important not to have the art scenedistorted by the idea that everythingis for sale,” says Mr Lynch.

That desire to move beyond thefocus on profitability is shared byMagnus Renfrew, Asia director at ArtBasel. “The arrival of M+ has incredi-ble potential in getting people tounderstand that there are issues otherthan the price of a work thatcan demonstrate its quality,” saysMr Renfrew.

Hong Kong has long been criticisedas a cultural wasteland dedicated onlyto making money. But many in thecreative sector believe the pieces areslowly falling into place and that localinterest in visual arts is growing. Arecent exhibition organised by theMusée National Picasso of Paris drewcrowds of almost 300,000 during itstwo months at the Hong Kong Herit-age Museum.

Mr Renfrew says the biggest changehe has seen since his arrival in 2007 isthe growing confidence that the city“has what it takes” to be a real globalplayer.

“Hong Kong is really maturing as a

cultural centre,” says Mr Renfrew.“We have all the elements of the cul-tural ecosystem coming together.”

Construction is also well under wayon Hong Kong island itself to turntwo Colonial-era police compoundsinto twin art and design hubs.

These new infrastructure projectsbuild on the success of Hong Kong’sart fair, founded by Mr Renfrew butnow owned and run by Art Basel. Thefair, which began in 2008, is now oneof the world’s largest, attracting morethan 60,000 visitors over three daysthis year.

Leading international galleries,including White Cube, Ben Brown andGagosian have also arrived in thecity, alongside well-known Chinesenames including Pearl Lam. Mr Ren-frew says they have helped to “ener-gise and invigorate” the city’s galleryscene.

Katherine Schaefer, Asia director atthe Mayfair-based Simon Lee gallery,says that Hong Kong now has the“wow factor” as an international artcentre, but to rival London andNew York, more needs to be done to

foster links with the city’s own artcommunity.

“It’s very important that there iscross-fertilisation with the localscene,” says Ms Schaefer. “In Londonor New York, the local artists are sokey. But in Hong Kong, they get over-shadowed by Chinese artists.”

Creating a grassroots arts scene isnot helped by the bugbear of many inHong Kong: soaring rents. Residentialand commercial property prices haverocketed in the city since 2008, thanksto a mix of low interest rates, buoyantinternational demand, and limitedsupply.

The result is that many local galler-ies have been hit by large rentincreases, forcing them to move out ofthe city centre and underminingattempts to create a vibrant down-town arts district.

Those costs are also detracting fromthe city’s allure for artists themselves– both local and international – ata time when other cities, notablySingapore, are taking concrete stepsto attract cultural talent and improveinfrastructure.

Contemporary art scene comes of age

Pumped up:‘Sacrilege’ byJeremy Dellerwas part of anexhibition of sixgiant inflatablesAFP/Getty Images

Pollution is a health concern

For a territory whose eco-nomic might was foundedon trading, the fact thattrading conglomerates ruleits daily life will come as nosurprise. For a visitor, theirreach is not immediatelyobvious, but it does nottake long to figure it out.

Take this short tour andconsider just three of thebetter known groups: Jar-dines, Hutchison Whampoa

and Swire Pacific. Say youarrived on business, stayingat the Mandarin Oriental(Jardines). Perhaps youflew in on a Cathay Pacificflight (Swire). Maybe afterbreakfast you headed to theLandmark development(also Jardines) for a meet-ing. Afterwards, wanderingto your next appointmentyou stopped by a Watson’spharmacy (Hutchison) forthe toothpaste you forgot tobring. Lunch, and you headover to one of the hotels orrestaurants in Pacific Place(Swire). At some point dur-ing the day, you stop by a7-Eleven (Jardines) for somewater, either Bonaqua(Swire) or Watsons(Hutchison). Browsed elec-tronic gadgets in one of thecity’s many Fortress stores?

That is a Hutchison-ownedchain, too.

These are just a handfulof the tangible ways HongKong is affected every dayby these vast groups, whichoperate under variousnames. Hutchison and Jar-dines also dominate thecity’s virtual supermarketduopoly and all three havevast portfolios of primeproperty. Their activitiesincreasingly extend intoChina and across Asia.

Hutchison attracts moreof the headlines, courtesy ofLi Ka-shing, its chairmanand Asia’s richest man. Thecompany, with interestsspanning ports, property,telecoms, infrastructure,energy and retail, is also amore active dealmaker.

Jonathan Galligan, con-

glomerates expert at CLSA,the Asian-based brokerage,says: “When you compareHutchison with Jardinesand Swire, it will alwaysappear to be more of anasset trader – it’s just thenature of the company andhow it looks at assets,”.

There has been specula-tion that Hutchison is cut-ting its bets on Hong Kong,its home market. In thesummer it floated the ideaof selling ParknShop, itssupermarket chain, thenlast month it dropped thesale for a wider review ofits retail business, whichincludes the UK Superdrugchain and France’s Marion-naud stores alongsideWatson’s, which is expand-ing rapidly in China.

“Jardines and Swire are

more about making invest-ments then scaling themup,” says Mr Galligan. “It’sabout putting money per-haps into Hongkong Landand Dairy Farm [Jardinesubsidiaries] and watchingit grow. Hutchison, how-ever, has equal interests inboth sides of deals in termsof buying and selling wholebusinesses.”

All have listed entities,but the interest in theirshares can be at odds withtheir sheer size and therange of their interests.

Four Jardine companies,for example, are membersof Singapore’s 30-member,blue-chip Straits Timesindex, with a combinedindex weight of 14 per cent.

However, in terms of theindex’s average trading vol-

ume, the four account forjust 1 per cent. Regardlessof lacklustre trading activ-ity, a recent survey by ana-lysts at Bank of AmericaMerrill Lynch showed threeof those four – Jardine Stra-tegic, Jardine Matheson andHongkong Land – areamong the top 10 Asianstocks where fund manag-ers are most overweight.

This means they are

heavily betting on thegroup to perform, which ithas been doing. Holding thestock for the past 10 yearswould have netted an inves-tor a total return eighttimes the initial stake.

Money invested in theentire Straits Times index,would have only doubledover that time.

One Singapore-based ana-lyst says: “People do likethe stocks. They have gen-erated a lot of value. Jar-dine’s management is doinga good job.”

Investor interest in SwirePacific, meanwhile, hasslipped since last year’s flo-tation of a fifth of SwireProperties – which isresponsible for Pacific Placeand other landmark devel-opments in Hong Kong.

All three groups are stillheavily invested in theHong Kong property mar-ket. Over the past few yearsthat has produced stunningreturns, through enjoyinglow US interest rates whileriding the boom years ofChina’s emergence.

Now that boom is underthreat, as China’s growthslows and the US preparesto remove some of its mone-tary stimulus.

Still, Hutchison, Jardinesand Swire have all beenactive in Hong Kong sinceeach was founded in the19th century, survivingwars, economic depressions,and booms over that time.

It seems a safe bet thatthese groups will continueto evolve alongside the ter-ritory they still dominate.

Hutchison, Jardines and Swire continue to dominate

For a visitor,their reach is notobvious, but itdoes not take longto figure it out

Environment

Local efforts willhave to be madein concert withneighbours, saysDemetri Sevastopulo

Conglomerates

The big players havebeen evolving sincethe 19th century,and look set to go on,says Jennifer Hughes

Culture

Additional museums andthe arrival of internationalgalleries follow the successof art fairs in attracting largecrowds, reports Josh Noble

Doing Business in Hong Kong

FINANCIAL TIMES MONDAY NOVEMBER 18 2013 ★ 3

Doing Business in Hong Kong

Gavin BowringAseanConfidential reporter

Paul J DaviesAsia financialcorrespondent

Jennifer HughesAsia Lex writer

Louise LucasAsia news editor

Patrick McGeefastFT Hong Kongcorrespondent

Josh NobleAsia regional marketscorrespondent

Naomi RovnickfastFT reporter

Demetri SevastopuloSouth China regionalcorrespondent

Adam JezardCommissioning editor

Steve BirdDesign

Andy MearsPictures

For advertising details,contact: Maralyn Ho, +8522905 5580;maralyn.ho@ft.com, or yourusual FT representative.

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Contributors »

tables for initial publicofferings, propelled by theflotation of Chinese compa-nies. But it lost the crownin 2012, and is struggling towin it back, which haspartly deflated optimism.Alibaba, the Chinese ecom-merce group, recently saidit might take its $60bn-plusIPO to New York, becauseHong Kong would not allowit to list with the ownershipstructure it wanted.

Hong Kong officials havemade it clear they will notchange the rules for onecompany, but in a sign thatthe territory is starting toworry about losing out, MrTsang and Charles Li, thehead of the stock exchange,have both recently said thatHong Kong should have aserious conversation aboutwhether its listing rulesneed to be changed.

One area where the cityhopes to remain dominant

is in the offshore renminbitrading and deposit market.

While other financial cen-tres such as London andSingapore have recentlyannounced deals with Bei-jing that make them morecompetitive – by boostingtheir ability to reinvest ren-minbi into assets in main-land China – experts sayHong Kong does not face aserious threat now, since itremains the key financialgateway between China andthe world.

But Ms Ip stresses thatwhile Hong Kong may notface an immediate chal-lenge, it cannot afford com-placency. She says thatwhile foreign companiesthink the city is a “greatplace to do business”, theydo worry whether the terri-tory can remain competi-tive in the long term withChina’s rise.

“Clearly, China is tryingto clone more IFCs [interna-tional financial centres],and we can’t blame themfor that,” says Ms Ip. “It’s abig country; they can’t havejust one Hong Kong.”

Continued from Page 1Hong Kong is also having

to consider other factorsrelated to the rise of China,such as whether it main-tains the 30-year old cur-rency system that pegs itscurrency to the US dollar.

Some experts, includingJoseph Yam, former head ofthe Hong Kong MonetaryAuthority, have suggestedthat the territory peg itscurrency to the renminbibecause of the increasedeconomic integration withthe mainland.

Hong Kong is also gear-ing up for its biggest politi-cal challenge since theformer British colony washanded back to China in1997.

As part of the handoveragreement, Beijing haspromised to give HongKong’s 7.1m citizens theright to elect their chiefexecutive – who sincehandover has been chosenby roughly 1,200 well-connected business andpolitical leaders – by 2017.

CY Leung, the currentchief executive, and histeam have come under criti-cism for not acting morequickly to start the consti-tutional change.

A group called OccupyCentral plans to hold massdemonstrations next sum-mer to try to force an out-come where Beijing doesnot have the ability to vetthe slate of candidates.

Mr Tsang argues thatwhile multinationals mayhave views on the issue,they are not preoccupiedwith the constitutionaldebate, saying, “businessesare a lot more concernedabout the bottom line”.

But Ms Ip says foreigncompanies are worried thatthe protest movement coulddamage the territory’s repu-tation for stability. Askedwhy Hong Kong would suf-fer, given that its protestsare generally among themost peaceful in the world,she says young people areincreasingly angry aboutproperty prices, particularlyas the gap between the richand poor widens.

“Hong Kong is really anoasis of law and order com-pared with many parts ofthe world . . . If we damagethat, we destroy our busi-ness opportunities.”

Headwinds hindersearch for identity

It is a rite of passage to gripe – andoccasionally gloat – about HongKong property prices. Companiessetting up in the territory have toaccept they will pay some of the

highest prices in the world for officespace and possibly dole out equallylarge housing allowances.

Likewise for retailers. Burberry, theBritish luxury brand, pays about $1ma month in rent for its store in HongKong’s Causeway Bay shoppingdistrict. Ralph Lauren is heading toHollywood Road, traditionally hometo purveyors of antiques, memorabiliaand general tat rather than expensiveUS clothing.

But it is not a uniform picture ofsky-high rents, as those who tookspace during the bleak days of Sars,the infectious disease that sweptthrough the territory in 2003, or theAsian financial crisis in 1997-98, cantestify.

“Hong Kong doesn’t do stable,” says

Craig Shute, a senior managingdirector at CBRE, the real estate serv-ices adviser. “It is rare that pricesremain in a 10 per cent band on eitherside.”

That is testament to the volatilityattendant upon a spit of land thateffectively has its interest rates set bythe US – courtesy of the Hong Kongdollar currency peg – and its demanddictated to a large extent from acrossthe border in mainland China.

Land is in pitifully short supply andgovernment policy on land sales hasmostly kept it that way. During timesof high inflation, property was seen asa classic hedge.

Car parking spaces have gone for$1.3m, enough to buy a street ofhouses in parts of England or the US.H&M, the Swedish clothing retailer,shuttered its flagship store leaving itsCentral District location to Zara, itsSpanish rival, to take up the keys andpay double the rent.

And there has been a veritableexodus of banks and businesses acrossthe water to Kowloon, once viewed asa hinterland by many expat bankers.

Recently, however, clouds havebeen appearing on the horizon. InFebruary, the government took stepsto cool the market, doubling stampduty on properties worth more thanHK$2m ($258,000) and introducing alower duty on cheaper homes.

At the same time, the Hong KongMonetary Authority, the territory’s defacto central bank, cut the maximumloan-to-value ratio to 40 per cent forcommercial and industrial spaces andintroduced a similar ratio for parkingspaces, the latest subject of specula-tive investment.

More recently, developers of bigprojects have been offering rebatesand discounts which, in some cases,have served to lop 20 per cent off theprice – although this “teaser” strategyhas helped them to sell subsequent

batches at higher prices. “Hong Kongseems to be at a crossroads,” says MrShute. “There are a lot of opinions onwhat will happen to pricing over thenext 12 months or so.”

In one corner are the pessimists –or optimists, depending which sideof the desk you are sitting on. Bar-clays, UBS and Merrill Lynch Bankof America foresee a downturn, withprices falling 30 per cent or moreby the end of 2015 on the back ofsupply increases and stalling incomegrowth.

“The magnitude of the fall is under-estimated,” wrote Barclays’ analysts.“The property market is about toenter its first real downturn since1998.” That was when Hong Kong wascaught up in the sell-off triggered bythe Asian financial crisis and homeslost two-thirds of their value over asix-year period.

Several factors support their cau-tion. The latest run-up in prices hasbeen strong: the property market hasmore than doubled since the onset ofthe financial crisis in 2008.

Buyers from the mainland, account-ing for as much as a quarter of homesales at the peak in the fourth quarterof 2011, dropped to only 8 per cent inthe first quarter of this year, accord-ing to Centaline, a property agency.

CY Leung, Hong Kong’s chief execu-tive, is on a mission to make housingmore affordable for the territory’s 7minhabitants, or at least to stem theupward spiral.

This means increasing supply – asimilar policy launched by one of hispredecessors Tung Chee-hwa after hecame to power in 1997 quickly dampedexuberance.

Volatility is as much athome as sky-high pricesProperty Even parking spaces can fetch huge sums, saysLouise Lucas

Selling point: Causeway Bay is home to high-end retailers Bloomberg

2017Year when citizens vote forHong Kong’s chief executive

4 ★ FINANCIAL TIMES MONDAY NOVEMBER 18 2013

Based purely on the num-bers, no financial centrehas mounted a real chal-lenge to Hong Kong when itcomes to the renminbi.

The city has been at theforefront of China’s movesto make its currency a glo-bally accepted form of pay-ment: it has been the testbed for reform, and the onlywell-established currencychannel in and out of Chinaitself.

The city not only has thelargest offshore depositbase of renminbi – at morethan Rmb700bn ($115bn) –but it is also the biggesttrading centre for the cur-rency outside the mainland.

HSBC estimates thatbetween $12bn and $13bn ofrenminbi trading takesplace in Hong Kong everyday, close to double theamount at the end of lastyear, and far higher thanthe $5bn exchanged daily inLondon.

Hong Kong has also beenhome to the majority ofr e n m i n b i - d e n o m i n a t e dinvestment assets. In 2010,the first “dim sum” bond –offshore debt raised in theChinese currency – waslaunched in the city.

Since then, the markethas grown into a globallyrecognised asset class, witha number of funds – and aFTSE-managed index –tracking its progress.

The renminbi qualifiedforeign institutional inves-tor (RQFII) scheme, a quotasystem enabling renminbiholders to invest directly inmainland China, was firsttrialled and then expandedin Hong Kong in 2012.

All of this builds on thecity’s natural edge.

“Hong Kong has the mostestablished renminbi clear-ing system. It has theadvantage of proximity toChina”, says Beng HongLee, head of China fixedincome, currencies andcommodities at DeutscheBank. “It also has theadvantage of the whole eco-system of professionals whounderstand China’s invest-ment environment.”

But, despite a clear headstart, others appear to becatching up. Taiwan has anoffshore debt market andits own clearing house,which went into action inFebruary, while Londonand Singapore bothreceived their own RQFIIinvestment quotas lastmonth.

The Chinese authoritieshave also set up new cur-rency swap agreements,often the first step in anincreasinglyf a m i l i a rpath thatincludesd i r e c tcurrencytrading, ar e n m i n b ic l e a r i n ghouse, andd e d i c a t e di n v e s t m e n tquotas.

The Euro-pean CentralBank is themost recenta d d i t i o n ,establishing aR m b 3 5 0 b n($57m) swapline a fewweeks ago.

But while politi-cians from Lon-

don to Sydney have been atpains to stress their respec-tive city’s advantages whenit comes to renminbi busi-ness, analysts have beenquick to play down thenotion of internationalrivalry.

Philip Tsao, managingdirector at Barclays, saysthat technical issues withinthe renminbi market, suchas the absence of a recog-nised benchmark yieldcurve needed to createhedging products, mean themore complex currencybusinesses that mightfavour London or Singaporehave yet to take off.

“It’s a question of how,not where at the moment.The how is still missing, soeveryone is competing forthe simple stuff right now,”says Mr Tsao.

Although growing fast,renminbi trading remains asmall slice of the global for-eign exchange markets.

According to Swift, thepayments company, theChinese currency has risento become the eighth mosttraded in the world, yet itstill makes up less than 2per cent of the total market.

In trade, the picture is notmuch different. The ren-minbi still languishes belowthe Hong Kong dollar andthe Norwegian krone whenit comes to global paymentscurrencies, according toSwift, despite China’s posi-tion as the world’s biggesttrading nation.

Currency analysts saythat, for renminbi businessto flourish, the global poolof liquidity needs toincrease a lot, and in multi-ple places.

As such, growing ren-minbi bases in Singapore,London, Taiwan and almostanywhere else should alsobe good news for HongKong.

The city’s place as thekey gateway for Chinesecompanies out of China,and for multinationalsgoing the other way, shouldalso help secure the city’splace as the centre fortrade-related business.

“Ultimately, renminbi ser-vices will be offered wher-ever there is significant cli-ent demand”, says Mr Leeof Deutsche Bank.

However, the concern insome quarters about thesustainability of HongKong’s number one spotdoes highlight the city’sshortcomings as a foreignexchange trading centre.

S i n g a p o r er e m a i n s

d o m i -nant inA s i a n

FX trad-ing, while

London isthe clear

global mar-ket leader.Should the

r e n m i n b ibecome freely

convertible andbegin to trade

like any other cur-rency, a large

chunk of futurestrading could gravi-

tate to London, whilerenminbi investmentmight move to the fundmanagement centre ofSingapore.

Ecosystem hasa natural feel forthe renminbiCurrency

Small slice of forextrade is growing,reports Josh Noble

For renminbibusiness to flourish,the global poolof liquidity needsto increase

If Hong Kong is to secureits future as an interna-tional financial centre whenChina opens up, one of itsbest hopes is to become afund management hub.

That is exactly what localregulators and legislatorsare hoping to achieve withnegotiations to grantmutual recognition betweenfunds domiciled in main-land China and Hong Kong.

The plan is designed tomake Hong Kong the mostattractive and obvious placefrom where internationalfund managers can try tosell investments to hun-dreds of millions of Chinesesavers.

“The strategic importanceof this is huge,” says SallyWong, chief executive ofthe Hong Kong InvestmentFunds Association. “It

reinforces Hong Kong’sposition as an asset man-agement centre and peopleare calling it a game-changer, because it willbring all parts of the valuechain to the city.”

Hong Kong has been, forthe most part, a marketingand distribution centre forfund managers who havebeen able to sell their inter-national products locallyusing the Ucits passportingsystem.

Ucits allows funds domi-ciled in places such as Dub-lin or Luxembourg to besold throughout Europeand, increasingly, to manyother parts of the world.

Hong Kong’s plans insistthat funds become fullydomiciled in the city inorder to qualify for mutualrecognition.

The hope is that thismove will create or securethousands of jobs. Onlyabout 15 per cent of theroughly 1,800 funds for salein Hong Kong at themoment are domiciledthere.

Ms Wong says: “Itwould be convenient for

international managers touse Ucits to sell into China,but the focus for HongKong is to tie in to thedevelopment of China andto promote the developmentof the Hong Kong and Chi-nese fund industries.”

However, many uncer-tainties remain around howthe scheme will work andwhat costs will be involved.That is stopping many man-agers from setting up fundsthat are fully domiciled inHong Kong.

Damien Barry, of StateStreet’s offshore fund serv-ices arm, says there aremany questions surround-ing the specific rules abouthow the scheme will work.

Who will run productapproval? What will thecapital controls or quotaslook like? Who will governthe sales process and inves-tor protection? Where willtax stack up, in Hong Kongor in China?

“There are lots ofunknowns,” he says, evenabout the most basic things.“What kind of productswill Chinese investors wantto buy?

“I think this can beextremely significant forHong Kong in terms offuture-proofing its role inChina,” Mr Barry adds.

“The quicker this goes tomarket, the better in termsof the competition withpassported products tocome out of Australia,Asean and Singapore, espe-cially.”

These uncertainties areholding some back fromlaunching new funds,although others are biting

the bullet and going aheadon the assumption that,once the rules come in,managers might have toshow a three-year perform-ance record before theirHong Kong-domiciled fundcan qualify.

There is also an expecta-tion that those who showcommitment early are morelikely to get quota alloca-tions, as has happened withmany other financial devel-opments in China.

However, Bo Kratz, headof Asia-Pacific for NorthernTrust, also reckons costsmay be holding peopleback.

“In a low-return world,costs are a huge focus,” hesays. “The beauty of Ucitsis that you can take apooled product regulated inone place and spread thecosts of running it overmultiple jurisdictions. Ifyou have to domicile fundsin Hong Kong, what makessense in terms of cost?”

Others think this is lessof an issue. “If you are seri-ous about selling onshore inChina, the incrementalcosts to set up in Hong

Kong seem marginal tome,” says Mark Konyn,chief executive of CCAM, aHong Kong-based assetmanager.

The bigger issues as hesees them are first thatHong Kong is very unlikelyto get an exclusive right tobe the only place withmutual recognition withChina. After all, it has notbeen granted that on anyother financial develop-ment.

Also, there is the questionwhether ordinary Chinesepeople will be interested inbuying funds from compa-nies they may never haveheard of.

Mr Konyn says: “Themainland audience is stillgoing to be drawn mostly tonames they know well,either through being localasset managers or comingfrom banks with buildingson the ground in China.”

But, as with so much else,the sheer size of China iswhat is creating the buzz.“The opportunity is sohuge,” says Ms Wong, “thateveryone is very, veryexcited.”

Regulators pursue China mutual recognition

Shane Early won the BarclaysMoontrekker 27km race lastmonth – he even set a courserecord. But he still doesn’tfeel entirely at home in the

elite running community of HongKong. The reason? He’s not a bankeror an executive.

“I sometimes feel like the odd manout,” says Mr Early, a schoolteacher.“It’s weird. Even my girlfriend is inbusiness.”

Legions of finance professionals andtype A personalities in search of high-end gyms and tougher-than-marathonraces are propelling a boom in thepremium market for gear, endurancenutrition and fitness techniques.

Asia Trail magazine, the firstregional monthly devoted to the out-door running craze, went on sale at70 outlets in Hong Kong on November1. Clement Dumont, a former marinebiologist, founded it after participa-tion in the 100km race that he organ-ised in 2012 nearly doubled to 1,400runners in 2013.

The magazine would not have beenviable a decade ago but, in the pastfive years, thousands of runners havestarted looking to challenge them-selves with tougher races, he says.

The foundation for near-masochisticfitness in Hong Kong was laid by theGurkhas – the special Nepalese unit ofthe British army known for its mili-tary prowess – who built stone stepsascending the peaks of the New Terri-tories and then trained on them.

In 1986, a 100km Gurkha-led train-ing exercise was opened to the public.The Oxfam Trailwalker will thismonth draw 4,800 competitors keen toconquer within 48 hours its 20 hillsand mountains, including Tai MoShan, the highest point in Hong Kongat 957 metres.

Until four years ago, Trailwalkerwas the only major 100km race inHong Kong. Now, there are at least

five, but, instead of satisfyingdemand, it seems they are only whet-ting it. The North Face 100, scheduledfor next month, recently sold out inseven days. Hong Kong’s first 100-mile, or 168km, race is scheduled forNovember 30.

William Sargent noticed competitivespirits were brewing back in 2009when he was working as an eventsco-ordinator. As a side project, helaunched Moontrekker, a dusk tilldawn race over Hong Kong’s second-tallest peak, on Lantau island, withrunners competing to reach the beachbefore sunrise. He had 380 registrantswithin six weeks.

He has since capped participation at1,300 runners, and the event was fullysubscribed in three days this year.Organising the race has become a full-time job for Mr Sargent and, in fiveyears, the event has raised $HK5m($645,000) for charities including Roomto Read, which supports literacy.

About 90 per cent of participantswork for multinational companies andmore than two-thirds work in financeor professional services, Mr Sargentsays. “There are very competitivetypes in the finance field,” he says.“My sense is that anything related tohealth and the outdoors will do reallywell here.”

Helmuth Hennig, a managing direc-tor at Jebsen, a marketing and distri-bution company that sent 16 runnersto Moontrekker, says training exer-cises have become like staff parties,but with a little more euphoria.

Craig Shute, senior managing direc-tor at CBRE, a property company,which sent 70 runners to Moon-trekker, says that “to survive thisbusiness culture, you need great stam-ina and a healthy balance”.

Trailrunner Lloyd Belcher noticeda year ago that good photographs atthe new races were a rare find. Heshowed up at the Lantau 2 Peaks race

with his camera, took a series of shotsand posted them to social media.

Within weeks, he was being offeredjobs at races around Hong Kong,which happen almost weekly betweenOctober and April. “For me, it wasjust an experiment,” Mr Belcher says.“I didn’t have any sort of businessplan. But it just went, well, close toviral.”

Hong Kong’s competitive scene alsobreeds a need for efficient relaxation,something Pure Group caught on toearly. It opened its first yoga studiowith two teachers, 11 years ago.

Colin Grant, the chief executive anda former tennis pro, founded Pureafter attending a handful of yogaclasses in British Columbia. Hesensed the health-conscious scene inHong Kong was underserved but hadpotential.

“After we opened, I thought, ‘therewill be about 50 [yoga] studios inHong Kong within a year’,” he says. “Iwas wrong. There were about 100.”

Pure operates 20 fitness and yogacentres across Asia, with 13 in HongKong, serving 50,000 clients with astaff of 1,200. Its newest yoga studio,in Mong Kok, occupies 35,000 square

feet. It has 55 showers for womenalone and has seven rooms to offer 30classes daily. A standard membershipincludes access to workout clothingand towels, so members can show upafter a business meeting without kit.

Mr Grant says the main obstacle isnot recruiting members, it is payingrent, an ever-rising liability in HongKong – but one that also entrenchesPure’s position.

The Hong Kongers driving the trendhave high disposable incomes and arewilling to pay for premium treatment.At Hayabusa, a martial arts club thatopened last year, members pay up toHK$2888 a month, plus more forprivate classes.

Co-founder Andy Lai says the HongKong fitness scene a decade ago wasonly about playing sport. Then, peoplejoined weightlifting and cardio gyms.More recently, the trend has expandedto high-end facilities with novel equip-ment and training methods.

With all the new offerings, it mightappear the market is becoming satu-rated. Mr Grant doesn’t think so.“This is just the beginning, if youhave the right model,” he says. “We’reat the tip of the iceberg.”

Entrepreneurscater for theserious matterof relaxationFitness From races longer thanmarathons togyms for the busy executive, it seems the cityjust cannot get enough, writesPatrickMcGee

Upward mobility:distance runningis proving to be apopular pastimefor Hong Kongexecutives

Lloyd Belcher

Sally Wong: strategy

Fund management

Questions surroundspecific rules foroperation of scheme,says Paul J Davies

Doing Business in Hong Kong

Hong Kong has a dilemma.The city has brushed up itscorporate governance stand-ards following some scan-dals at listed companies,with regulators taking astrong stance on investorprotection.

But critics say this isturning some companiesaway and making the

listing process too lengthyor costly for others.

And while stock marketoperator Hong KongExchanges and Clearingobtains just 17 per cent ofits revenues from listingfees, the large companiesthat go public in the citybring important bankingand professional servicesbusiness to the economy.

“The Hong Kong ex-change needs to keep itscompetitive place as some-where that can list Chinesecompanies successfully.

It is of course competingwith the US, and, long term,with Shanghai,” says Char-lie Awdry, portfolio man-ager of Henderson Global

Investors’ China Opportuni-ties Fund.

A new law that makesinvestment banks crimi-nally liable for fraudulentIPO prospectuses has wonplaudits from investors.

But the law is slowingdeals and making advisersshy away from workingwith smaller Chinese com-panies, market practitionerssay.

Meanwhile, Chineseecommerce giant Alibabamay choose New York forits $60bn-plus IPO, becauseHong Kong’s regulators didnot meet its demands towaive existing rules.

Hong Kong boasted theworld’s biggest IPO market

in 2009-11. It slipped behindNew York and London lastyear and remains in thatposition so far this year,according to Dealogic.

IPO sponsors became lia-ble for the content of pro-spectuses on October 1. Therule change gave HongKong one of the world’smost stringent listingregimes, but was deemednecessary after some high-profile scandals.

Last June, Hontex, a Chi-nese fabric maker, agreedto repay HK$1bn ($129m) toinvestors after it wasaccused by market regula-tor the Securities andFutures Commission of fal-sifying its prospectus.

And in April 2011, ChinaForestry, a Yunnan-basedtimber company that hadgone public less than 18months beforehand, wrotedown the value of its plan-tation assets by overRmb2bn ($328m) after audi-tor KPMG highlightedaccounting irregularities.

In the year or so beforeimplementation of the newrule, which was long-trailed, advisers started“behaving extremely cau-tiously”, says Mark Chan, aHong Kong-based partner atlaw firm Berwin LeightonPaisner who advises Chi-nese companies on IPOs.

“Things are definitelyslowing down, Mr Chan

adds. “Advisers have to doa lot more diligence.”

He adds that the SFC andthe listing committee ofHKEx are scrutinising pro-spectuses much moreclosely than in 2011.

“Deals have a muchlonger lead time. We aretalking to clients now whoare expecting to list in2015.”

A couple of years ago, MrChan says, the process oflisting a company “wouldtake six to nine months”.

Observers say that Ali-baba soured on Hong Kongbecause the SFC would notallow the company to listwith a dual-class sharestructure that allowed its

management to nominatethe majority of the board.

The structure would have“separated votes from capi-tal”, says David Webb, aHong Kong corporate gov-ernance expert and share-holder activist, by givingAlibaba’s bosses, whobetween them own justover a 10th of the company,more powers than otherminority investors.

HKEx declined to com-ment on Alibaba. ButCharles Li, head of theHKEx, blogged that HongKong risks “losing a genera-tion of company’s fromChina’s new economy”.

And John Tsang, HongKong’s financial secretary,

has backed calls for amarket consultation to alterthe city’s listing rules toallow dual-class structures.Investment bankers couldwelcome such a change.

But while bending therules to suit individual com-panies might create deals inthe short term, it couldharm Hong Kong, some say.

Mr Awdry says: “Havinghigh governance standardsis one of Hong Kong’s bestdefence mechanismsagainst losing out to otherexchanges. If the companiesthat list in the territoriy arereal companies, and well-run companies, that shouldput Hong Kong in a reallystrong position.”

Businesses balk at listing under tough new regulatory regimeGovernance

Tighter rules havechecked IPOs butare good for the city,says Naomi Rovnick