Macau, city skyline at sunset.
In late 2019 as the 20-year anniversary of Macau’s return to China was celebrated, there was speculation that Beijing sought to elevate the status of the former Portuguese crown colony from a mere gambling hub to an offshore financial center. While there was never an intention to replace Hong Kong, Beijing seemed to be considering transforming Macau into a secondary offshore financial center for China.
A key part of that logic was that Macau benefits from the same one country, two systems model that governs Hong Kong, although the former's legal system is Portuguese rather than British. Following a visit by Chinese President Xi Jinping to Macau in December 2019, China’s banking and insurance regulator announced a series of policies to deepen financial ties between Macau and the mainland. In a statement, the regulator said that Macau banks are encouraged to expand to the mainland, mainland financial firms would be supported in their expansion to Macau and that mainland insurance capital will be allowed to invest in Macau.
More than four years after Xi’s visit and those policies were announced, progress has been modest at best. Yet with the 2023 launch of a new asset trading exchange in Macau, it is clear that the initiative has not been abandoned, and given Beijing’s focus on developing the Greater Bay Area, the territory is likely to carve out a niche within that broader financial hub.
Macau Micro Connect Financial Exchange
In March 2023, Macau launched a new asset class called Daily Revenue Obligations (DROs) on the Micro Connect Macau Financial Assets Exchange (MCEX), which is backed by Charles Li Xiaojia, the former CEO of Hong Kong Exchanges and Clearing (HKEX). DRO units are focused on providing funding to China’s SMEs in exchange for part of their daily revenue. The MCEX is the second trading platform in Macau, coming 4 ½ years after Namkwong Group established Chongwa Macau Financial Asset Exchange (MOX) in August 2018 for bond offerings.
Retail investors are not permitted to trade DROs. Indeed, only institutional investors who are members of MCEX can trade them. The members are mainly banks, insurance companies, asset management firms and pension providers in Macau or other jurisdictions.
MCEX and DROs are not intended to compete with Hong Kong’s capital markets. Rather, this exchange appears to have been created to help the most vulnerable segment of China’s economy. The overall Chinese economy has had difficulty recovering from zero-Covid restrictions and SMEs have been hit the hardest.
A survey of more than 9,300 SMEs conducted in Dec. 2023 by Peking University found that 71% reported having outstanding receivables, with the construction and manufacturing industries the most seriously affected. The SMEs’ cash flows were badly squeezed by the lack of timely payments, which were mainly attributed to high debt levels among local governments.
Cooperation With Luxembourg
Shortly after the establishment of MCEX, Macau’s first trading platform, MOX, signed a cooperation agreement with the Luxembourg Stock Exchange (LuxSE) to include the admission of MOX-listed securities for trading on LuxSE’s exchange-regulated market, the Euro MTF. According to the International Financial Law Review, the bonds dual listing “marks a breakthrough in building international financing channels for multi-currency and cross-border two-way capital operation systems, bridging domestic and overseas markets and demonstrating high-quality credit qualification to the international capital market.”
In addition, Macau Chief Executive Ho Iat Seng visited the Luxembourg Stock Exchange and met with the country’s Prime Minister, Xavier Bettel. The purpose of Ho’s visit was to better understand Luxembourg’s success as a small country building a significant financial sector. Ho said that Macau’s government aims to learn from Luxembourg how to develop a secondary market for bonds in Macau as it works to build a “modern financial industry.”
Founded in 1928, the Luxembourg Stock Exchange is an important stock exchange in Europe and one of China's leading overseas bond issuance markets. The Luxembourg Stock Exchange is also notable for establishing the world's first green bourse in 2016.
No Replacement For Hong Kong
While Macau has made some important strides growing its financial sector since late 2019, it is no way competing with Hong Kong. The Peterson Institute of International Economics, a prominent think tank based in Washington DC, wrote in May 2020 that “China thinks Macau can replace Hong Kong as an international financial hub,” which is far from how things have played out four years later.
Indeed, Hong Kong has been steadily growing as a wealth management hub. Thanks in part to an inflow of cash from the Greater Bay Area, the former British crown colony’s wealth management assets grew to HK$30.5 trillion (US$3.9 trillion) by the end of 2022 compared to HK$23.96 trillion four years earlier.
Meanwhile, Beijing has reportedly tripled the investment limit for people investing in the cross-border Wealth Connect scheme in the Greater Bay Area. GBA residents can now invest up to RMB3 million ($421,790) in the products included in the scheme. This move will increase the choices for GBA retail investors in the GBA area, providing them with better access to offshore markets.
In the years ahead, we expect that the GBA will continue to develop as a financial hub, with Hong Kong the paramount anchor thanks to its status as a global financial center. Macau can play a complementary, targeted role, providing funding for Chinese SMEs and developing cross-border bond issuance markets with Luxembourg and perhaps other jurisdictions.
