Dragoman Digest

Hong Kong regains global financial crown through mainland Chinese capital

State-backed financial flows drive record IPOs while the broader economy stagnates

Hong Kong has reclaimed its position as a premier global financial centre in the first half of 2025, surpassing New York, London, and Mumbai in IPO fundraising. The Hang Seng has become one of the world’s best-performing indices with an almost 30 percent year-to-date return. The territory has raised more capital from listings than any other exchange in the first half of 2025, including CATL’s more than US$5 billion listing – the largest globally since 2023. This revival follows years of pessimism after Beijing’s crackdown on Hong Kong’s pro-democracy movement and harsh Covid-19 measures.

However, this success is not broad-based. It flows almost entirely from mainland Chinese sources following Beijing’s April 2024 directive to “consolidate and enhance Hong Kong’s position as an international financial centre”. Chinese companies now dominate new listings, with the largest deals coming from firms already listed on the mainland launching secondary listings. Mainland investors buying shares through the expanded stock connect scheme account for over 25 percent of Hong Kong’s stock turnover. Capital inflows have reached a record HK$1 trillion (US$128 billion) this year. Chinese companies are also viewing Hong Kong as a viable option for fuelling international expansion, bypassing China’s stringent capital controls.

The mainland-dependent financial boom masks the struggling real economy. Retail sales have declined for 14 consecutive months as residents increasingly shop in nearby Shenzhen, accessible via local metro with significantly lower prices. With the broader economy growing three percent in the first half of 2025, some economists see Hong Kong becoming “the Manhattan of China” – a workplace where financiers commute for business but retreat to the mainland for leisure and living. The provincialisation of Hong Kong is not limited to finance. Nineteen global law firms closed Hong Kong practices by 2023, while multinationals from FedEx to L’Oréal relocated regional headquarters to Singapore. Western bankers capturing growing fee shares remain wary of deeper commitment given geopolitical risks. Hong Kong’s shift from “Asia’s world city” to “China’s world city” has secured its financial future – even if finance is increasingly disconnected from the local real economy. This echoes a pattern of Beijing using state-directed capital to secure strategic objectives. As in other cases, there is often an economic price.

Asian powers recalibrate as Washington’s erratic policies accelerate Beijing’s strategic gains

Nevertheless, China’s export-led model undermines its capacity to anchor alternative economic order

China’s military parade marking the 80th anniversary of World War II’s end brought together President Xi Jinping, Vladimir Putin, and Kim Jong Un for their first filmed appearance as a trio, crystallising an emerging anti-Western alignment. More significantly for Beijing’s strategic ambitions, the preceding Shanghai Cooperation Organisation (SCO) summit saw Indian Prime Minister Narendra Modi pay his first visit to China in seven years, participating in a warm group photo with Xi and Putin. This diplomatic coup came shortly after US President Donald Trump’s imposition of 50 percent tariffs on India, citing continued Russian oil purchases. Many had expected closer Indian and US ties under Trump, given their ostensibly warm personal rapport. The US president later acknowledged on social media: “Looks like we have lost India and Russia to deepest, darkest China.”

These realignments reflect accumulating pressures rather than isolated incidents. Trump’s claim to have ended an India-Pakistan military clash in May drew Pakistani endorsement but angered India – which has consistently sought to avoid the Kashmir conflict being internationalised. This episode, followed by punitive tariffs, has strengthened the hand of elements in India’s foreign policy establishment who have long seen Russia as more reliable than the US. The hostility toward India proves particularly self-defeating given two decades of bipartisan American policy cultivating New Delhi as an indispensable counterweight to China. Beijing has capitalised without offering significant concessions. The SCO’s proposed development bank, stalled since 2010, is now going ahead as Russia’s growing Chinese dependence removes its longstanding objections.

Yet, China’s economic model limits what benefits it can offer partners. Since the collapse of its property market, China has pursued an export-led growth model with renewed vigour. Manufacturing nations are facing diminished market access. With some exceptions, trade between SCO members also remains limited, certainly when compared to NATO. Politically, bodies like the SCO remain “very loose and dysfunctional”, containing both India and Pakistan and occasionally feuding Central Asian nations. While most SCO nations share grievances against US dominance, they lack economic complementarity or a shared political vision. China buys Russian oil for its discount pricing, not out of solidarity. Translating loose political alignment into economic integration will prove elusive when China offers mercantilism rather than market access.

BMW goes all in on software to close gap with rivals

German giant’s ‘superbrain’ technology faces uphill battle on costs despite massive investment

Germany’s BMW is staking €10 billion on “superbrain” technology that delivers 20 times the computing power of current vehicles through its Neue Klasse platform. BMW has 40 new models and model updates planned over the next two years which will use its platform. The pivot towards software-defined vehicles and electrification is a core part of BMW’s strategy to future-proof its offering. Neue Klasse will integrate battery, software, and computing systems into a single foundation across electric, hybrid, and combustion variants. The iX3 sport utility vehicle – the first model built on Neue Klasse – features four centralised computers controlling everything from infotainment to automated driving. It will also feature 800-kilometre range and 10-minute rapid charging.

Yet, industry analysts acknowledge BMW is “betting the farm” on technology that may still leave it unable to match Chinese rivals’ offerings. Germany Inc.’s combined market share in the most important auto markets – Europe, the US, and China – has fallen below 20 percent for the first time in decades. BMW’s China sales declined by 15.5 percent in the first half of 2025 alone. BMW, Mercedes, and Volkswagen are laggards when it comes to the software transformation. BMW ranks 14th in Gartner’s 2025 annual ‘digital automaker index’ – measuring automakers’ potential to monetise software. Mercedes and Volkswagen place 13th and 16th, respectively. All three are far behind Chinese and US brands that dominate the top positions.

Meanwhile, Chinese manufacturers have already mastered both software-defined vehicles and cost-efficient EV production. BYD, GAC, and XPeng showcased extensive model ranges at this year’s Munich motor show that undercut German pricing by significant margins. While BMW has achieved sizeable cost savings with its new cylindrical lithium-ion batteries produced in partnership with CATL, its EVs still have much thinner margins than traditional internal combustion engine vehicles. The German giants’ survival may depend less on matching Chinese production costs than on whether Western consumers will pay premiums for perceived engineering excellence. This bet grows riskier as Chinese quality rapidly improves.

Global trade frictions force Chinese car manufacturers to rethink export strategies

Trade barriers in China’s key export markets may force more local manufacturing

Chinese vehicle exports have surged in recent years, making the country the world’s largest exporter of passenger vehicles. This growth was initially driven in large part by exports to Russia, which in 2024 accounted for one-fifth of China’s overall auto shipments. Chinese brands filled a void created by the departure of Western and Japanese brands after sweeping sanctions were placed on Russia following the invasion of Ukraine in 2022. Mexico has also been a major market for Chinese vehicles, overtaking Russia to become the largest buyer of Chinese vehicles in the first half of 2025.

However, a constellation of factors has driven China’s key auto export markets to implement a range of non-tariff and tariff barriers. In late 2024, Russian authorities implemented a so-called “recycling fee” on imported vehicles. The fee functions like a tariff and has seen the cost of some vehicles go up by as much as US$8,000. With the market share of Chinese companies reaching over 50 percent, the Russian government was forced to intervene to protect local industry. Mexico has also in recent weeks signalled that it will place tariffs of up to 50 percent on Chinese vehicles. Mexico’s decision was motivated by a combination of imperatives, including the need to protect local industry, raise revenue, and to placate the Trump Administration. The US has long feared that China is using Mexico as a conduit to bypass tariffs.

These trade barriers come on top of the EU’s tariffs of up to 45 percent on Chinese EVs. In Russia’s case, sales of Chinese vehicles have already dropped markedly. Sales declined precipitously from around 478,000 units in H1 2024 to 180,000 over the same time period this year. In response, Chinese companies are likely to double down on markets with negligible domestic auto production like Australia and the UAE. Chinese companies are also likely to pursue more local manufacturing, as they have already begun doing in places as disparate as Hungary and Indonesia. Local manufacturing will, at least to some extent, negate China’s current cost advantages.

US renewable sector begins to feel the pain of multiple policy changes

The apparent pivot to bolster traditional energy sources could complicate the Trump Administration’s industrial ambitions

The advent of the Trump administration has introduced a radical shift in US energy policy. Traditional baseload generation assets such as coal, natural gas, nuclear, and advanced nuclear (“small modular reactors”) are being prioritised, at the same time as subsidies and tax credits for intermittent renewable electricity generation and storage assets are being removed. The most tangible demonstration of this preference has been the accelerated phaseout of wind and solar tax credits legislated through the Inflation Reduction Act. Under changes brought about through the One Big Beautiful Bill Act, projects that start producing electricity after 31 December 2027 will be ineligible for tax credits – except for those that begin construction by early July 2024.

Tariffs of up to 3,521 percent on solar panels produced in Southeast Asia by Chinese companies will raise costs considerably for solar developers. The increasingly arbitrary nature of policymaking is exemplified by cases such as Danish wind developer Ørsted. In late August, Ørsted was presented with a stop-work order by the Bureau of Ocean Energy Management for its Rhode Island offshore wind project. The Bureau gave little explanation beyond national security concerns, forcing Ørsted to abruptly halt a project that is 80 percent complete, with 45 out of 65 turbines installed.

These adverse policy conditions are already showing up in the data. US renewable energy project cancellations hit US$18.6 billion so far this year alone. Investment announcements have fallen by nearly 20 percent to US$15.8 billion. By 2030, Bloomberg NEF is forecasting that onshore wind additions will decline by 50 percent from their 2024 baseline, representing nearly US$19 billion in lost investment. The Trump Administration has emphasised its commitment to lowering energy costs to ease inflation and support the reindustrialisation of the US economy. The spate of project cancellations will evidently do little to lower power bills or meet the surging demands of power-hungry data centres.