Hong Kong Capital Markets Overview: Creating a better future through innovation and collaboration

February 26, 2024

We are very pleased to collaborate with the International Consulting Club at HKUST to release a Hong Kong Capital Markets report. This report explores the economic backdrop and existing challenges impacting Hong Kong’s capital markets. We also touch on the potential opportunities Hong Kong can tap into to accelerate the growth of the financial market.


In February 2024, CSRC, China’s main securities industry regulator, replaced the head of its securities regulator as policymakers struggled to stabilize the country’s main stock indexes after a plunge to five-year lows. The cabinet removed Yi Huiman as chairman of the China Securities Regulatory Commission (CSRC),  replacing him with Wu Qing, a veteran securities regulator who had led the Shanghai Stock Exchange and served as a key deputy in Shanghai’s municipal government. Yi’s removal comes as Chinese markets spiral downward as institutional and retail investors scramble to cut their losses, with the sputtering economy and slower-than-expected government stimulus measures weighing heavily on confidence. Whilst China has grand plans to accelerate the maturity of its capital markets, significant challenges remain in making China’s financial markets a top investment choice for global investors. This paper explores some of the existing challenges and why we are optimistic that these challenges can be overcome in the long term.

Executive Summary

The last decade has been one of unprecedented change in the global economy, leading to critical implications for the overall market and investor sentiment. Most notably, market dynamics in terms of US-China geopolitical relations are shifting, as are key macroeconomic factors such as inflation and interest rate uncertainties. The Hong Kong capital market is under the spotlight, sparked by a liquidity crisis in Mainland China’s property sector and uncertainties in the regulatory environment. Nearly nine-tenths of the foreign money that flowed into Mainland China’s stock market in 2023 has already left. This has weighed down Hong Kong’s Hang Seng Index and Mainland China’s CSI Index. Although Hong Kong’s unique legal system and investor mix set it apart from Mainland China, Hong Kong’s financial system has an inextricable relationship with the rest of China. The future remains uncertain due to factors such as a sluggish post-pandemic recovery, regulatory uncertainties, and high tensions between China and the US. Rising US interest rates and the depreciation of the Chinese yuan further encourage investors to seek less risky opportunities elsewhere. However, with its well-established financial infrastructure, international connectivity, strategic focus on technology, government support, and strengthening ties with the Middle East, Hong Kong has significant upside and advantages over other jurisdictions in the region in the long term. With stronger collaboration with other regions and technological adoption supported by favorable regulatory policies, we are optimistic that Hong Kong will maintain its status as an international financial epicenter.

Economic Backdrop

Hong Kong’s financial services industry and many sectors have been significantly impacted by the COVID 19 pandemic. By the end of 2022, the total AUM of asset/wealth management in Hong Kong had decreased by 14% year-on-year. Despite much of the world returning to a more normal state by 2022, Hong Kong and Mainland China were among the last places to remove quarantine restrictions, delaying the recovery of local businesses until 2023.

Capital Outflows

After COVID restrictions were removed, there has been an increasing and interconnected capital outflow in both Mainland China and Hong Kong. Hong Kong recorded a large-scale outflow of HK$140 billion out of the Hong Kong stock market in February 2023, while its accumulated foreign capital outflows reached HK$1.05 trillion. In September 2023, China suffered US$75 billion of capital outflows after a US$42billion flight in August, which is the largest since 2016. According to Goldman Sachs, foreign funds sold US$2.1 billion of Chinese stocks in mid-September, taking the six-week outflows to a record US$15 billion.

In October 2023, China and Hong Kong experienced a combined $3.1 billion net outflow from active long-only funds, the third consecutive month of net selling exceeding $3 billion. Foreign funds further sold US$5.1 billion out of the onshore stock market. Generally, Hong Kong and Mainland-listed companies suffered a decline in their stock prices, driving valuations down. For example, Alibaba Group, e-commerce rival JD.com, food delivery platform operator Meituan, and Tencent all declined by more than 30% in 2023. The continuous capital outflows have reduced Hong Kong’s aggregate balance and pushed the interbank rates to 14-year highs, further draining cash to the lowest level in two years.

Key Drivers of Capital Outflow

The main drivers of the capital outflows are two-fold, namely the poor sentiment towards China’s business and economic recovery outlook and the rising US interest rates. The bankruptcy of real-estate giant Evergrande, the arrest of senior banking executives, and new regulations across technology, gaming, and education sectors have further fueled investors’ worries over investing in China. These factors led to foreign companies (primarily US-based firms) scaling back their operations in China and diversifying their supply chains in other regions of Asia, such as India and Southeast Asia. Additionally, widening interest-rate differentials and significant depreciation of the Yuan against the US dollar have contributed to the capital outflow, particularly from high-net-worth individuals and families. Large capital outflows have hindered the ability of fast-growing companies and startups to raise capital and find cornerstone investors to support IPO listings