The sovereign wealth fund attached to the Hong Kong Monetary Authority (HKMA) is ploughing a new furrow, tying itself closer to China’s Belt and Road Initiative by forging a HK$16 billion (US$2.1 billion) co-investment platform with the Beijing’s Silk Road Fund.
Initially, the SRF and the HKMA’s HK$4 trillion (US$500 billion) Exchange Fund will set up a BNR HK Flagship Impact Fund with up to HK$7.8 billion (US$1 billion) in capital to invest in infrastructure and energy transition, with a strong ESG mandate. The initiative will tie the semi-autonomous territory closer to Beijing’s global ambitions, enabling it to recover some of the status it lost as an international financial center during unrest three years ago.
With a renewed focus on the territory’s economic development and relationship with the mainland, HKMA also last month signed an MoU with China’s state planner on cross-border financing activities for mainland corporations and the development of the offshore bond market. They will jointly promote Hong Kong’s green and sustainable finance market and yuan-denominated bond market by encouraging mainland Chinese enterprises to issue green bonds via Hong Kong. Chinese companies have seen offshore issuance of US dollar bonds contract this year with a 78% slump to US$8.7 billion by end-June, according to Bloomberg. Debt default by mainland real estate developers and high interest rates have largely been responsible for the contraction. Bonds denominated in hard currency in Hong Kong more than halved in total value in 2022, although green finance held up, signalling that in that aspect the territory was still relatively robust.
Launched in 2014, the SRF now manages a total capital of US$40 billion and CNY180 billion; a fresh injection of CNY80 billion was announced by President Xi Jinping at the opening ceremony of the third Belt and Road Forum in Beijing. It is backed by funding from sovereign wealth funds the State Administration of Foreign Exchange (SAFE) (65%) and the China Investment Corporation (15%) as well as the Export-Import Bank of China (15%) and the China Development Bank (5%).
The Exchange Fund is already looking at private equity and infrastructure investments in post-pandemic growth sectors, such as healthcare, tech and energy transition under its long-term growth portfolio.
SRF is also exploring collaboration with the Hong Kong Investment Corporation (HKIC), which was recently formed by the territory’s government from the consolidation of various investment vehicles established by the HKMA, including the Hong Kong Growth Portfolio, Greater Bay Investment Fund, Strategic Tech Fund and the recently launched Co-investment Fund. The new government-owned SWF is tasked with promoting investment in strategic industries to boost the long-term competitiveness of the territory’s economy, while generating a return. Altogether, the new state-owned investor’s portfolio is estimated at HK$62 billion (US$7.9 billion), around 2% of GDP.
The pools of money were intended to claw back some of the competitiveness lost amid a turbulent point in Hong Kong’s history. Strategic investments aim to bring benefits to the territory’s economy, marking a departure from the established practice that the HKMA’s Exchange Fund does not invest in Hong Kong due to potential conflicts of interest and linking savings too closely with the domestic economy.
Hong Kong sees the need to raise its game to match Singapore’s growing strength in life sciences, foodtech and advanced manufacturing, although the HKMA lacked Temasek’s experience in venture capital and private equity. The creation of the HKIC aims to overcome the HKMA’s lack of expertise in private equity, as well as marking a departure from Hong Kong’s traditional free market approach and adopting a more Singaporean way of nurturing the territory’s strategic growth.