Li Xiaojia, CEO of Hong Kong Exchanges and Clearing (HKEx), said recently that preparations for the Hong Kong-London Connect were proceeding satisfactorily at the technical level. But he added that they may be adversely affected by Brexit when it comes to issues of supervision and administration. So far the HKEx has only been discussing matters concerning supervision and administration of the HK-London Connect with the Bank of England and institutions from the European Union. This part of the negotiations may not proceed that well while Britain and the EU are preoccupied with ways to break up over the next two years.

His was the first authoritative comment about the impact of Brexit on Hong Kong as an international financial center since the UK chose to leave the EU in a referendum last month.

It is common knowledge that London could not have become a global financial center by relying on the British economy alone. Likewise, Hong Kong could not have become the international financial center in Asia without relying on other major economies. The HK-London Connect is designed to put both cities in a win-win situation by allowing them to increase trade and expand the size of their markets. Now that the UK is leaving the EU the British economy will suffer as its access to the European market becomes difficult and, consequently, cast a shadow over the HK-London Connect by leaving the two financial centers in a vulnerable position. And that is not all the harm Brexit will have on Hong Kong as an international financial hub in the future.

London has long been regarded as Europe's answer to New York when it comes to global finance, but this status is in doubt now because the UK will lose the clout it once had when it was part of the European market. Moreover there is the growing possibility of it being damaged by the UK falling apart if Scotland and Northern Ireland declare independence in order to remain in the EU.

In the controversial referendum, London was the only region in England that voted against Brexit, as did Scotland and Northern Ireland. After they were defeated in the referendum many Londoners signed a petition asking the new mayor to declare independence for the city so it can join the EU and become a signatory of the Schengen Agreement. This is even though Britain has two years to negotiate with the EU over matters concerning their relations and it will take much longer to see if the UK will indeed break apart. There are signs the country, and London in particular, is already suffering from "separation anxiety" and serious concerns about its waning appeal to overseas investors. The fall of the British pound against the US dollar following Brexit is one bad omen of what to expect soon.

Now, how about Hong Kong? Does London's predicament suggest an opportunity for Hong Kong to somehow replace London as a global financial center? The answer is "not necessarily". As far as offshore yuan trade is concerned, the EU and eurozone will no doubt support Frankfurt's efforts to vie for regional dominance against London, which means Hong Kong is in no position to step in.

As for corporate investment and finance in the UK, one does not need to look further than Hong Kong tycoon Li Ka-shing, who warned before the referendum that his company would reduce investment in the UK if Brexit went ahead. Following the vote, Una Galani, editor of Reuters Breakingviews, wrote in a commentary: "Europe exit dulls Britain's appeal to Asia Inc. Britain no longer looks like a sunny safe haven for Asian corporations. Companies from Japan to India have historically been drawn to the United Kingdom for its stable market, its openness to foreign investment, and access to the European Union. Now they must grapple with a weak currency, political disarray, and a likely recession. Until they have more clarity on future terms of trade between Britain and the European Union, investors in the country will suffer." However, due to obvious geo-political concerns, there is no guarantee businesses will choose Hong Kong over London for investment or corporate financing needs.

Some people have suggested that Hong Kong is the third global financial center after New York City and London. But this situation will not continue if London lets itself decline by leaving the EU. This is because the following reshuffle of global political and economic power will continue no matter which country drops out. Hong Kong will have the opportunity to rise from being a regional financial center in Asia to a global one like New York City with or without London as a competitor. This is because the key to its success depends on its close ties to the Chinese mainland economy - the second largest in the world.

(HK Edition 07/06/2016 page1)