Hong Kong is a beacon of capitalism known for its low taxes and free trade agreements. Since gaining independence as a sovereignty in July 1997, it's attracted interest from international investors worldwide. Hong Kong consistently leads the world on the Index of Economic Freedom.
A resilient economy, Hong Kong has weathered setbacks such as the Asian financial crisis of 1997 and the 2008 global economic downturn. New trade tensions with the United States, which began an escalating series of tariffs in 2018, could have a negative effect on momentum.
- U.S. investors can easily gain exposure to Hong Kong's securities with ETFs, which provide instant diversification in a security that trades on a U.S. stock exchange.
- Benefits of investing in Hong Kong include being perhaps the most important financial center in the world as well as its geographical location.
- Drawbacks could include its geopolitical relationship with China and its economy's concentration in the finance sector.
Quintessential Free Market Economy
Hong Kong was once described by economist Milton Friedman as the world's greatest experiment in laissez-faire capitalism, letting the market do its own thing without government restriction.
Hong Kong hosts the fifth largest stock exchange and largest initial public offering market in the world as of 2018 and has one of the greatest concentrations of corporate headquarters in the Asia-Pacific region. One in seven households is a millionaire in U.S. dollars, with real estate representing 70% of assets, according to a 2018 Citibank survey.
Investing in Hong Kong with ETFs
The easiest way for U.S. investors to gain exposure to Hong Kong's securities is through exchange-traded funds (ETFs), which provide instant diversification in a security that trades on a U.S. stock exchange. Investors can also consider one of many American Depository Receipts (ADRs) that offer exposure to a single foreign security on a U.S. stock exchange.
The most popular Hong Kong ETF is the iShares MSCI Hong Kong Index Fund (NYSE: EWH), which has $2.3 billion in net assets. With an expense ratio of just 0.48%, the ETF is relatively cheap compared to many mutual funds. It has reduced its financial sector concentration to 36% and increased real estate holdings to 25% as of 2019. Its 21% concentration in AIA Group Ltd. makes it somewhat exposed. Some popular Hong Kong ADRs include:
- AIA Group Ltd. (OTC: AAGIY)
- Sun Hung Kai Properties Limited (OTC: SUHJY)
Hong Kong's Benefits and Risks
While Hong Kong certainly represents an attractive investment destination on the surface, certain factors could make it a riskier investment during a financial crisis such as the one Asia experienced in 1997.
Benefits of investing in Hong Kong include:
- Leading Global Economy: Hong Kong is the freest country and perhaps the most important financial center in the world.
- Proximity to Asian Growth: Many of the world's largest economies moving forward will be based in Asia, which puts Hong Kong in a strong geographical position.
Risks of investing in Hong Kong include:
- Geopolitical Issues: Hong Kong's proximity to China puts it at risk of geopolitical issues that could affect how business is regulated, particularly as many business leaders originate from the country.
- Concentration in Finance: Hong Kong's economy depends heavily on its financial sector, which puts it at greater risk during financial downturns.
Overall, Hong Kong's transparent regulatory system provides a healthy climate for entrepreneurs to start new businesses. Worth watching, however, is a bill proposed in 2019 that would allow China to extradite Hong Kong residents and foreign and Chinese nationals on a case-by-case basis so they can stand trial. After unprecedented business opposition and public protests, Hong Kong leader Carrie Lam modified the conditions for extradition to serious crimes with a minimum punishment of seven years and vowed to incorporate human rights protections.
Hong Kong already has extradition treaties with 20 nations. Opponents of this bill worry that it erodes the historic legal autonomy from China that Hong Kong has enjoyed. The autonomy is credited with Hong Kong's status as an international financial leader.
A U.S. congressional commission has said if the bill passes it would provide grounds to revisit the terms of its relationship with Hong Kong that date back to 1992.