By Samuel Shen and Noah Sin
SHANGHAI/HONG KONG (Reuters) - In the streets of Hong Kong, activists protest against China's new security law. But in the trading rooms of Asia's dominant financial hub, investors are cheering the mainland's embrace.
Hong Kong markets will benefit from more listings by Chinese companies, more mainland money, and more financial links with the world's second-biggest economy, traders and analysts say, despite legislation some fear will erode the city's freedoms.
Beijing unveiled the law on Tuesday, and Hong Kong police made their first arrests of protesters under the legislation on Wednesday.
But the street chaos may not spill onto Hong Kong's stock market when it reopens on Thursday after a public holiday, investors say. The Hong Kong dollar
"As long as Chinese companies come and list in Hong Kong, the party will go on," said Francis Lun, CEO of Geo Securities, Hong Kong.
"Finance people are just obsessed with making money. Nothing can deter them from their only goal in life," Lun added, saying the finance industry was "living in a parallel universe" compared with "democracy fighters".
That disconnect could reflect the city's yawning wealth gap. It also underscores Hong Kong's increasing economic reliance on the mainland.
Investors' view of the law could change eventually if questions over Hong Kong's judicial and political independence force expatriates and businesses to leave, costing the economy dear.
Markets have been bracing for some impact, causing Hong Kong's stock market to underperform. The Hang Seng index (HSI) rose 3.5% in the last quarter, compared with 8.5% gains in Chinese shares (SSEC), and MSCI Asia ex-Japan's (MIAPJ0000PUS) 18% rise.
If there is a correction in the Hang Seng, it will mainly reflect a fragile economy and weak corporate earnings, said Linus Yip, Hong Kong-based chief strategist at First Shanghai Securities Ltd.
Washington's moves to revoke Hong Kong's special treatment under U.S. law will have limited impact, most analysts say, while closer economic ties with China will benefit the city.
"The more interesting thing is U.S. restrictions forcing Chinese companies to list in Hong Kong, that's only going to continue, which will be phenomenal for the Hong Kong stock market and the Hong Kong exchange," said Kay Van-Petersen, global macro strategist at Saxo Capital Markets in Singapore.
CHINA'S EMBRACE
Song Seng Wun, an economist at CIMB Private Bank, Singapore, said the fresh wave of secondary listings in Hong Kong by big Chinese companies is drawing massive amounts of cash into the city.
"Nothing pulls people more than if they can make money. So while there's plenty of uncertainty in terms of what this new security law entails, the money appeal remains a key magnet."
In the first half of the year, secondary listings of U.S.-listed Chinese tech giants JD.com (O:JD) (HK:9618) and NetEast (O:NTES) (HK:9999) - the world's top 2 and top 3 flotations respectively - made Hong Kong the world's third-biggest initial public offering (IPO) market, according to accountancy firm EY.
Money from Chinese listings would also bolster Hong Kong's currency, said Bruce Yam, strategist at Everbright Sung Hun Kai, Hong Kong.
This week, China also announced details of a Wealth Management Connect scheme that links investments and financial services between Hong Kong, Macau, and their neighboring mainland cities, as part of a scheme to integrate Hong Kong more closely with the mainland.
Chinese companies already account for 73% of Hong Kong's stock market capitalization, and China-related IPOs accounted for 82% of such funds raised in Hong Kong last year.
"From a long-term perspective, the release of the National Security Law increases the predictability of Hong Kong's stability," said Mark Dong, Hong Kong-based co-founder of Chinese asset manager Minority Asset Management, which buys Hong Kong stocks via cross-border stock connect schemes.