It was supposed to be the year Hong Kong rebounded onto the world stage, leaving behind an era marred by street clashes, political crackdowns and Covid curbs.

Instead, 2023 turned out to be one of the worst for the financial hub in recent memory, at least as far as its markets are concerned.

The Hang Seng Index has fallen 15 percent, losing ground to rivals in Tokyo and Mumbai, and putting it among the biggest decliners globally. Funds raised by initial public offerings are the smallest since the dotcom bubble burst. Home sales are on track to be the lowest for any year since records began in in 2002. Office rents have fallen to levels last seen 13 years ago.

Underscoring the malaise, the city has been dubbed the “ruins of an international financial center” on Chinese social media, a viral label rejected by financial services chief Christopher Hui. The minister said Hong Kong’s status wasn’t a building that could be brought down by pressure. Chief Executive John Lee also weighed in, saying data including bond flows and new insurance premiums show the city remains a leading financial center.

Evidence suggests Hong Kong’s position as Asia’s premier hub isn’t at risk right now. It’s home to the regional headquarters of Wall Street banks, while almost half the hedge fund managers in Asia are based there, according to Preqin Ltd. data. Hong Kong remains the best place for firms looking to crack China’s economy, and history shows the city bounces back from financial tumult.

“The Hong Kong market has lived through two world wars and numerous crises,” said Qi Wang, chief investment officer in wealth management at UOB Kay Hian. “The challenge we face today is immense but nothing we haven’t seen before.”

Yet Hong Kong is facing powerful headwinds.

Foreign capital is increasingly shunning China at a time when the country’s slowdown is weighing on domestic consumption. Hong Kong’s borrowing costs have surged due to a currency peg with the greenback. Expats and younger locals have left in droves as financial sector jobs dry up and concern mounts over the city’s future under greater oversight by Beijing.

Research firms are doubting Hong Kong’s ability to uphold the institutions that underpin its status as a finance hub.

Last week, a researcher cut Hong Kong’s corporate governance ranking to the lowest level in decades, citing a perceived deterioration of minority shareholder rights and independence of the judiciary. Earlier this month, Moody’s Investors Service lowered its outlook for the city, partly due to signs of reduced autonomy in political and legal spheres.

The government’s pursuit of activists is challenging ties with the West. Washington and London last week criticized Hong Kong for putting bounties on five dissidents living overseas. Global attention will shift this week to the national security trial of media mogul Jimmy Lai, who is accused of colluding with foreign forces and conspiring to publish seditious material.

The imperative for Lee to reverse the decline in investor confidence is increasing. President Xi Jinping tasked him with strengthening Hong Kong’s position as an international financial center when he visited the former British colony last year for Lee’s inauguration.

In a sign that Beijing is growing concerned, officials from China’s Ministry of Finance traveled to the city last week to meet with bankers from firms including HSBC Holdings Plc and Standard Chartered Plc to discuss ways to bolster the city’s hub status.

Hong Kong “could do more to project itself and its advantages as a business center,” said Andrew Seaton, chief executive of China-Britain Business Council, a UK group promoting trade and investment with China.

Further deterioration next year would likely increase doubt over the Lee administration’s ability to meet the demands of an international city and undercut Xi’s efforts to increase foreign investment needed to shore up China’s struggling economy.

(Bloomberg)

The Cheung Kong Center Two under construction in the Central district on Jan. 24. (Bloomberg)

Hong Kong's year of regret for investors