Hong Kong strife puts managers on alert

Money managers say the massive protests that have rocked Hong Kong for three months and counting have been more an annoyance than a threat thus far to the special administrative region's status as a leading Asia asset management hub, even as they concede a turn for the worse can't be ruled out.

With Chinese military police positioned on Hong Kong's border with the mainland, Beijing warning it could intervene and a small minority of the territory's hundreds of thousands of demonstrators throwing Molotov cocktails and battling police, room for miscalculation remains ample on both sides.

So far, at least, the turmoil, and the potential for escalation, haven't soured money managers already established there on the territory.

There are no signs yet that the protests — which take place predominantly on the week- ends and the evenings — are prompting an exodus of money management talent from Hong Kong, said Andrew Tsui, chairman of executive recruiting firm Korn Ferry's Hong Kong office.

"I haven't heard of anyone on the financial-services side looking to move anywhere else," agreed Jeremy Harris, a founding partner with Wellesley Partners Ltd., a Hong Kong-based executive recruitment firm for the Asia-Pacific region.

Still, the recent spate of clashes and tense standoffs may be narrowing the flow of fresh money management blood to the territory.

Mr. Harris said for his business, fallout has been more noticeable on the recruitment side, where some potential candidates outside Hong Kong — looking at the protests through the prism of dramatic televised reports — have proven less willing to consider relocating there.

Likewise an asset servicing veteran, who declined to be named, noted that one hedge fund client looking to establish a base in the region ultimately opted for Singapore rather than Hong Kong, after weighing whether the special administrative region was "worth the hassle" now.

For the most part, what disruption there has been in Hong Kong, as traffic-clogging demonstrations have broken out in key business districts and occasionally at the airport and subway stations, has been mitigated with the help of contingency plans, such as allowing employees to work from home, if necessary, said the regional head of one U.S. money manager, who declined to be named.

A few managers, meanwhile, have opted to push back planned events, including DWS, Deutsche Bank's asset management arm, which on Sept. 1 postponed its quarterly briefing, scheduled for the next day, on the investment outlook for the Asia-Pacific region, citing "the current situation in Hong Kong."

Still, even managers that have continued to expand operations in Hong Kong this year say a spark — set off by any number of scenarios — could hasten grimmer outcomes.

Every day you have to ask "what if," said the Asia-Pacific head of one global money management firm, who likewise declined to be named.

The Hong Kong government's latest annual industry survey, released July 26, showed 42,821 investment, sales and operations staff working in Hong Kong's asset and wealth management industry at the close of 2018. That's up 15.5% from the year before, reflecting the survey's first-time inclusion of insurance company asset management staff.

A spokeswoman for Hong Kong's Securities and Futures Commission, which conducts the survey, declined to provide a revised figure without insurance sector totals. Staff figures were up 5% the previous year.

Asked whether the commission has seen any signs that the protests are slowing the industry's momentum, the spokeswoman referred back to the latest survey's conclusion that "asset management is a growing industry in Hong Kong."

Commission CEO Ashley Ian Alder didn't respond to requests for comment.

Even if there are no signs of big money management firms looking to downsize their Hong Kong operations in response to the protests, competing hubs in the region might be getting a closer look.

An executive with a Big Four accounting firm, who declined to be named, said some smaller money management firms with Hong Kong as their sole base for operations in the region are mulling now whether they should open an office in Singapore as well or perhaps Shenzhen, where China is offering incentives for managers to set up.

Most big money managers already have offices in both Hong Kong and Singapore. According to Pensions & Investments' tally of the top 10 money management firms in terms of assets under management, only Vanguard Group Inc. doesn't have a Singapore office.

The Malvern, Pa.-based manager closed its Singapore office in mid-2018, saying it would "consolidate its Singapore operations and distribution activities under Vanguard Investments (Hong Kong) Ltd. in Hong Kong" to increase efficiencies and streamline its operations. A spokesman for the firm didn't immediately comment when asked whether Vanguard might reconsider that decision in light of the recent turmoil in Hong Kong.

Looked at over a longer span of time, Hong Kong's charms as a gateway to China's fast-growing asset management market could diminish as Beijing allows offshore managers greater access, as it has pledged.

Hong Kong remains a very important hub in the region for global managers but it's reasonable to expect more and more of their push to build out businesses on the mainland to be driven by locally based teams as opposed to teams in Hong Kong, noted one consulting industry veteran based in Shanghai, who declined to be named. Even as that shift plays out over time, however, Hong Kong should remain a key global money management hub for a vibrant Asia-Pacific, ex-China and ex-Japan region, he said.

Foreign managers are enjoying ever-greater scope to control their businesses on the mainland, but the transparency and free flow of information Hong Kong offers — together with the access to the crucial mainland market offered now by programs like Stock Connect and Bond Connect — will "continue to make Hong Kong a very viable" base for managing money globally, agreed Korn Ferry's Mr. Tsui.

For now, observers say there are some hopeful signs that Hong Kong's government and Beijing are showing the kind of restraint that could work to avoid a confrontation that would be a losing proposition for all.

Recent full-page advertisements taken out by Hong Kong's government — calling the problems that led to the protests a "complex social, economic and political jigsaw puzzle" that Hong Kong will solve, over time, "on our own" — were welcomed by some industry veterans as a clear step up from the government's earlier unyielding response to the protesters.

On Sept. 4, Hong Kong's chief executive, Carrie Lam, answered one of their demands, withdrawing a bill — which was suspended in June — that would have allowed Hong Kong citizens to be extradited to the mainland and tried there. The introduction of that bill prompted hundreds of thousands of protesters to the streets over the past three or four months.

For now, observers see reason to hope that Beijing will work hard to avoid direct intervention. One long-term priority for Beijing is bringing Taiwan back under its control — a goal that could only be set back by China's direct involvement in quashing the protests in Hong Kong, said one banker, who declined to be named.

But with demonstrators continuing to turn out in droves, pursuing goals — such as universal suffrage — which money management executives call pipe dreams, it's still too early to say with confidence which way the wind is blowing, market veterans say.

In the end, China "will get what it wants but what will that create in Hong Kong," asked the asset servicing veteran. That "depends on what happens over the next few weeks (and) it will be interesting to see."