HONG KONG -- It was only two weeks ago, as tear gas wafted through the streets of Hong Kong, that Alibaba Group Holding announced it would go ahead with the world's biggest stock placement this year.
For Beijing, the prospect of a multibillion dollar share issue by the Chinese e-commerce giant had huge symbolic importance. Despite six months of increasingly violent anti-government protests and thousands of arrests, it would bolster Hong Kong's status as a global financial center.
On Tuesday, Alibaba fulfilled that role. Investors rushed to buy more than $11 billion of shares in an offering oversubscribed multiple times. Better still from Beijing's point of view, stock in Alibaba, which is also listed in New York, surged over 7% in the first 30 minutes of trading.
As one equity capital markets banker put it: "We couldn't have achieved the same pricing or interest in any other Asian market."
That terse statement speaks volumes about Hong Kong's valuable role in connecting the world's second largest economy to global capital -- at least for now. If China is to succeed economically, Beijing knows that it must have a credible financial center.
Yet will that center always be Hong Kong?
Bankers and economists said that the protests, combined with the pro-democracy camp's resounding victory in Sunday's local elections and a likely new U.S. law that will review the city's human rights status every year, will prompt Beijing to accelerate the development of Shanghai and Shenzhen as alternative financial venues.
"The protests illustrate the need for at least another international financing hub within mainland China," the banker added. "While ground work has already begun, President Xi Jinping and his team might just need to speed things up."
Ever since the U.K. handed Hong Kong back to China in 1997, it was often said that the city's special status -- which includes an independent judiciary and unrestricted currency convertibility -- would give communist China the time it needed to prepare its domestic markets for full-scale liberalization.
Over two decades have passed since, and the city still plays an outsize role in Chinese finance. A third of equity financing by Chinese companies took place in Hong Kong between 1997 and 2018. Bonds issued in Hong Kong have longer maturities, and the city also accounted for a 26% of the syndicated loans of Chinese companies.
Nonetheless, signs of the erosion of Hong Kong's position are clear. Its share of Chinese corporate bond issuance declined from almost 90% at the start of the decade to two-thirds last year. The U.K and China opened in June a stock connect scheme that will allow Shanghai-listed companies to raise new funds via London's stock market.
China has also promoted its domestic equity markets with the launch of a new Nasdaq-style bourse, the so-called STAR market, where tech companies can list.
Relaxed listing requirements mean that many of those listings have a highly speculative fizz, which may return to haunt investors later. Nonetheless, Chinese companies have raised $73.5 billion in equity and convertibles on mainland exchanges this year compared with $67.4 billion in 2018, according to Dealogic.
Few would go as far as David Schwimmer, the head of London Stock Exchange, who this year rebuffed an unsolicited bid by the Hong Kong Stock Exchange when he questioned whether the city would even have a "competitive position" in the future.
Nonetheless, "The globalization of finance is already eroding Hong Kong's role in China's financial system," Andrew Collie, managing director of Orient Capital Research in Hong Kong, said.
"Road shows for equity and bond transactions now take place in all major funding markets, from London to New York," he added. "Instead of having [just] one big pipe to Hong Kong, China can build multiple pipes that connect mainland markets with other global hubs."
Bankers stressed it would take time to build out those alternative hubs and pipes. As of today, neither Shanghai nor Shenzhen are ready to be a global financial center.
Both lack the soft infrastructure of bankers, lawyers and accountants -- not to mention the schools and cultural life that attracts such talent and their families -- that Hong Kong still enjoys, even if the protests have reduced the city's appeal to many professionals, some of whom are now leaving.
More fundamentally though, "it is hard to imagine a credible global financial center in a country which still imposes capital controls," as Louis Gave, CEO of Gavekal Research in Hong Kong, wrote in a Nov. 20 note to clients.
Indeed, it is noteworthy that Alibaba chose Hong Kong for its secondary listing, despite reported encouragement from Beijing that it chose Shanghai. Other Chinese companies are widely expected to follow its example and list in Hong Kong too. As Charles Li, CEO of the stock exchange commented on Tuesday: "We will be here for them."
"These are areas where Hong Kong is irreplaceable for China in the short-run without a major cost," Alicia García Herrero, chief Asia-Pacific economist at Natixis in Hong Kong said. "Changing the listing venue [to, say, Shanghai] would send a signal. But then questions arise as to whether the new venue has investors with deep pockets and an appetite to buy Chinese issuance."
Hong Kong's rule of law is another reason behind its success as a financial center. Indeed, the stock exchange's 27-member listing committee recently denied listing approval for Megvii after it asked for more information about the impact of U.S. sanctions on the Chinese facial recognition company.
Alibaba's unusual governance structure, which failed to win acceptance from Hong Kong regulators, is also why the company first listed in New York in 2014; the rules were changed last year after a lengthy process of consultation.
Nonetheless, what the protests and possibility of U.S. sanctions may well do is shorten Beijing's time frame to reduce China's dependence on Hong Kong -- even if that means going so far as to introducing currency convertibility.
"It will be an irony that the die-hard students of Hong Kong's besieged Polytechnic University will be unlikely to appreciate if their protests helps to push forward, and accelerate, financial liberalization in the mainland of cities of Shenzhen and Shanghai," said Gave.