HONG KONG -- When Hong Kong's stock market index was reshuffled last week, the standout changes seemed to encapsulate China's growing dominance of the international financial hub.
Gone from the Hang Seng Index after five decades was Swire Pacific, the trading house redolent of the era when Hong Kong was a British colony. In has come Meituan, the Chinese food delivery group, which will make up 5% of the index's weighting.
Chinese investment and influence in Hong Kong's corporate life is increasing just as entities from other nations reconsider their presence, underscoring the deep-rooted changes taking shape as Beijing moves to diminish the city's autonomy.
China's dominance extends beyond representation in the city's stock market -- where Chinese companies have this year accounted for a record 98% of new listings and now make up half of all listed companies -- to property, businesses, jobs and trade.
The influence goes beyond sheer numbers. Mainland-based companies, several with government backing, are playing increasingly assertive roles and propping up the territory's economy, which is staring at its longest recession ever.
Since its return to Beijing's sovereignty in 1997, the once-busy entrepot has modeled itself as a gateway to China, which overtook Japan as the world's second-largest economy. That propelled Hong Kong to a position as the most important global financial center after New York and London. Now the world's largest equity-raising hub and third-largest dollar trading center, it hosts 163 licensed banks and 2,135 asset managers.
But the nature of Hong Kong's relationship to China seemed to many to shift significantly this year after Beijing ignored international concerns and imposed its own "national security law" on the city.
As a consequence, companies from U.S. to Japan are weighing reducing their presence in the city just as Chinese investors step up their activity. The international character of Hong Kong's corporate life is taking on a deeper Chinese hue.
"Hong Kong-mainland China integration will be even more entrenched, and Hong Kong's growth will rely more on the mainland." said Tommy Wu, lead economist at Oxford Economics.
While most mainland company executives are not able to travel to Hong Kong because of the coronavirus pandemic, some mainland financial institutions are expanding in the city as they expect more businesses once the border reopens.
China Minsheng Bank, CMB International Securities and Tonghai Securities have added office space in the city while global banks, including Nomura Holdings and Macquarie Group, have ceded space.
The addition of offices by Chinese companies has provided some relief to landlords as the office vacancy rate in the center of Hong Kong climbed past 5% to a 12-year high, attributed to the COVID-19 pandemic.
International buyers, meanwhile, have become more cautious. In the first half of the year, 98% of Hong Kong's cross-border property deals were made by mainland buyers, compared with 61% in all of 2019, according to property consultancy Collier International. Rosanna Tang, head of Hong Kong and Southern China research, said there have been more inquiries made by mainland investors looking for property purchase opportunities over the past few months.
Mainland developers are also among the most aggressive bidders in Hong Kong government's land auctions. In July, China Mobile paid HK$5.6 billion ($720 million) for industrial land in Shatin after outbidding eight rivals, while Shenzhen-based developer China Vanke acquired a residential plot in Tai Po for HK$3.7 billion.
It is a "good chance" for mainland Chinese companies to invest in Hong Kong, right now, Jonathan Choi Koon-shum, chairman of the Chinese General Chamber of Commerce Hong Kong, told Nikkei Asia. He said that he sees state-owned conglomerates and private enterprises continuing to enter Hong Kong as "they can recruit people much cheaper and for better conditions," partly a consequence of the stress on the local economy, which has had five consecutive quarters of contraction.
Unlike businesses from democratic countries, which tend to believe that the "one country, two systems" arrangement is eroding, Choi said mainland companies feel that Hong Kong remains sufficiently separate from the mainland. And he believes that mainland companies will increase their investments in Hong Kong because they feel more confident about the stability of the city after the passage of the national security legislation.
Given international attention surrounding implementation of the laws, "Beijing wouldn't want to see a collapse of Hong Kong's economy," said Simon Lee Siu-po, a senior lecturer at the Chinese University of Hong Kong. Despite its tightening political control, Beijing still wants to convince international investors that Hong Kong is as strong as it used to be, he said.
That means it is likely to encourage companies to help fuel the growth of Hong Kong, especially when its economy has been hit hard by the pandemic, he said.
The national security law, imposed on Hong Kong by the central government at the end of June, carries criminal penalties up to life imprisonment for those found guilty of separatism, subversion, terrorism and collusion with foreign powers. Critics say the legislation could be used to crack down on dissent, unnerving global businesses.
After the law was approved, the U.S. withdrew the special status that treated Hong Kong separately from the mainland and helped to underpin its prosperity. The move made the former British colony part of an escalating conflict between Washington and Beijing.
Almost two-thirds of 183 respondents polled by the American Chamber of Commerce in the city in July said the national security law would have a negative impact on their business prospects in Hong Kong. The respondents represent about 15% of the chamber's membership.
A majority of Japanese companies with a presence in Hong Kong are also concerned about the national security law, a survey released in October showed, with 34% contemplating restructuring operations there or leaving the territory entirely.
Hong Kong government data points to this nervousness. While the number of Chinese companies with offices in the city has surged by two-thirds since 2015, the number for their U.S. and Japanese counterparts has stagnated.
Additional reporting by Kenji Kawase, Nikkei Asia chief business news correspondent.