How Hong Kong’s multinational and global funds are preparing for the worst

A phrase you’ll hear with a lot more friction than you used to, on the subject of geopolitics, is “worst-case scenario,” as a senior Hong Kong investment banker remarked.

Its increased deployment is revealing, he said. Although the worst-case scenario may be remote, a dwindling number of companies and investors feel they have any permission to ignore that risk.

The worst-case scenario that worries him most focuses on China, the US, Xi Jinping’s ambitions, the aggressively hardening consensus in Washington and the fate of Taiwan. Things may yet calm down, and leadership summits may ease tensions, but for now at least the hostilities seem irreversible and the divergence permanent. a dangerous combination.

The coming months, the banker suspects, will be humming along with experiments and contingency planning (some much, some much less) based on a grand – but now more imperative – pessimism.

“There is now a fear among US and European investors that if something happens to China, you will be wiped out,” says a senior US asset manager. , Hong Kong is highly vulnerable to that terror.”

Also, Hong Kong is a sensible place for multinational companies and global funds to set up a scheme. They should start with the assumption of an abrupt end to life as we know it, recommend a fund manager, and work backwards.

The Russian invasion of Ukraine has made this planning a more focused process than it would otherwise be. The spectacle of decades of corporate investment in Russia vanishing and entire portfolios of assets being reduced to zero overnight has powerfully shaped a similar fear around China.

There are two areas in which Hong Kong is likely to provide both early and regular indicators of where global funds and multinational corporations have moved on from China’s risk perception. Look to Hong Kong, says another banker, to reach for another phrase of the moment, for a sense of how everyone is now “recalculating their options”.

Bankers and other consultants say one of the first big signs of a radical shift in thinking is what they report as a growing number of US and European multinationals looking to completely carve out their China businesses and separate them. Exploring the idea of ​​listing from. Hong Kong would be a possible destination for those initial public offerings.

AstraZeneca, the UK-headquartered pharmaceutical giant, is one of the first to take such a plan beyond the purely theoretical, but bankers are clear that many others have at least started to look into it.

There will undoubtedly be a range of different approaches and significant pitfalls. But the basic idea of ​​encircling China’s trade would be to secure two forms of protection. The parent company will no longer face questioning over its China exposure; In the event of some crackdown on foreign firms, the Chinese business may be allowed to survive if its local listing means Beijing now considers it a domestic player.

For the time being, the benefits for companies exploring this option may be largely psychological and, if necessary, a way to appease shareholders: Businesses will leave their Plan B prominently on the chief executive’s desk. , but hopefully it will collect dust. If the strategy catches on as widely as bankers skepticize, however, the mass thrashing of Plan B will be a useful litmus test of corporate anxiety: the more plans are heard being dusted, the greater the sense of risk. There is more.

Another set of experiments that Hong Kong should be in a strong position to observe is how companies actually respond to all those pressures to “de-risk” supply chains. Many of them, say the bankers involved in financing these proposed moves, have substantially altered supply chains from China to and from Southeast Asia and beyond. Many people are motivated by the need to be seen doing something.

But, as many have discovered, hopes of a quick and sweeping “lift and shift” need to be tempered by the reality of the scale and complexity of China’s manufacturing set-up. Bankers say there was very ambitious talk about planning an exodus from China, but it has been largely scaled down.

Again, companies’ announced efforts to respond appropriately in case of a worst-case scenario are likely to resume in line with the perceived level of risk. Those closest to the ground – many in Singapore, but far more in Hong Kong – should be able to tell exactly how much is happening.

leo.lewis@ft.com