China has a firm retort for Western elites who argue that Hong Kong’s economy and financial hub future is a dead duck: follow the money.
In a global finance forum in Beijing over the weekend, Fang Xinghai said all the appropriate and predictable things an audience expects the vice-chairman of China Securities Regulatory Commission to say.
China, he pledged, is stepping up efforts to raise its economic game, strengthen the financial infrastructure and attract more foreign investment.
Yet it was Fang’s Sunday comments about broadening the scope for China’s stock connect program link with Hong Kong that grabbed headlines.
Ostensibly, the goal is to lure more capital to the mainland. Beijing is working up revised rules to increase the number of mainland stocks in circulation that foreigners can hold, a percentage that now stands at a miserly 4.7%.
For comparison, there are 30% quotas in Japan and South Korea.
What Fang really did was remind why rumors of Hong Kong’s demise have been greatly exaggerated.
Hong Kong remains the favored and expanding conduit through which the flood of foreign money rushing China’s way arrives. Clearly, some of that capital will find its way into Hong Kong assets, properties and other local businesses.
Count Jack Ma among those who did not get the rest-in-peace memo. His Ant Group is making the Hong Kong Exchange a central player in what’s expected to be history’s biggest initial public offering (IPO).
Ma isn’t listing in New York, as Alibaba did in 2014 with enormous fanfare. Nor is Ant confining its US$30 billion IPO extravaganza to Shanghai. Ma is splitting the difference: a dual listing in Shanghai and Hong Kong.
It’s a share sale almost perfectly designed to ruin Donald Trump’s month. The two greater China financial centers the US president has been trying to suffocate are about to sideline Wall Street.
Heavy hand on Hong Kong
To be sure, it’s been a disorienting couple of months for “Asia’s World City.” Would it be better, in a perfect world, if Xi Jinping’s China hadn’t in July imposed a new national security law on the city by fiat?
Might Hong Kong look better to global investors if handcuffs hadn’t been slapped on Apple Daily founder Jimmy Lai and pro-democracy “goddess” Agnes Chow?
Could Hong Kong Chief Executive Carrie Lam be doing more to reassure multinational companies mulling escapes to Singapore, Taipei or Seoul?
To be sure, President Xi’s Communist Party has not covered itself in glory these last few months. Nor are a series of People’s Liberation Army drills in the Taiwan Strait going to win Xi many points for moderation or diplomacy.
Yet as Ma’s huge IPO reminds us, there are a number of reasons why Hong Kong could indeed live on once the dust settles and a city that exists to do business adjusts to life closer to the mainland’s geopolitical orbit. Here are three.
One: many of the same attributes that long endeared Hong Kong to the Heritage Foundation and the Wall Street Journal, which publish the annual Index of Economic Freedom, love about the place aren’t about to go away.
If author Ayn Rand, patron saint of modern-day libertarians, had devised an economic system from whole cloth, it would look very much like Hong Kong.
In the years after the return to Beijing rule in 1997, its ease-of-doing business sensibilities, ultra-low taxes, stable currency, unfettered capital flows, duty-free port and rule of law remained largely intact.
This last feature is now in question, of course.
Bankers and investors have reason to worry that China might import a legal apparatus akin to Beijing’s. But knowing the repercussions – lots of household-name companies yanking away tens of thousands of good-paying jobs – why would China gut the legal protections on which CEOs rely?
Or leave a high-skilled workforce just as angry as the Generation Z-ers who took to the streets in 2019?
It remains to be seen if Hong Kong’s Randian run is drawing to a close. Doing so, however, would be an epic misstep at a moment when China is trying to buttress its free-market bona fides and morph the yuan into a global reserve currency as the dollar sheds credibility.
Again, it would be better if China weren’t clamping down on Hong Kong. But let’s not confuse Xi seeking greater control with turning the city into Pyongyang.
“Hong Kong is not dead – to say so is to ignore the agency, creativity and defiance of Hong Kongers,” says Ben Bland, author of Generation HK: Seeking Identity in China’s Shadow and a Lowy Institute researcher.
As much as Ma’s massive IPO is a turning point for China’s capital markets, it’s also a shot in the proverbial arm that Hong Kong needs at a precarious moment for its status as a credible and transparent financial hub.
Two: Xi’s Greater Bay Area extravaganza.
Something that should give the Hong Kong-is-dead narrative pause is the lack of large-scale capital outflows over the last 30 days. One reason many are taking a wait-and-see approach is related to the $68.4 billion infrastructure disbursement made by China’s National Development and Reform Commission.
It’s but the latest piece of Xi’s Guangdong-Hong Kong-Macao Greater Bay Area juggernaut. For all the chatter about the Belt and Road Initiative and Asian Infrastructure Investment Bank, it’s this project that’s the real game-changer.
It aims to pool the energy, ingenuity and fortunes of Hong Kong and Macau with nine municipalities: Guangzhou, Shenzhen, Zhuhai, Foshan, Huizhou, Dongguan, Zhongshan, Jiangmen and Zhaoqing in Guangdong Province.
We’re talking about a size of about 56,000 square kilometers with a combined population of more than 72 million, gross domestic product (GDP) of nearly $1.7 trillion and GDP per capita of around $23,371. That’s pretty much the annual output of Canada.
And when the world’s most populous nation seeks to raise its economic game creating a Silicon Valley East, clustering four coastal cities into a high-tech megalopolis, it’s hard to ignore.
Add in bustling Guangzhou, which will be the administrative hub, Macau’s trade and tourism portfolios, Shenzhen’s markets and startups and Hong Kong’s global hub status and the Greater Bay Area almost warrants a spot in the Group of Seven (G7).
All that transacting, all the tech “unicorns” about to be created, all the IPOs about to burst out of this 11-regional economy bloc will keep the Hong Kong Exchange plenty busy, whether western investment banks stay or go.
Three: Donald Trump’s “Chinafication” tactic.
The US president’s team forgot something very basic: when trying to beat China, it’s best not to turn your nation Chinese. Has Peter Navarro, Trump’s China-bashing advisor, noticed that attacks on Huawei, TikTok, WeChat and mainland 5G in general are right out of the “Beijing Consensus” playbook?
And really, are Trump’s attacks on America’s institutions – the judiciary, the legislature, the press – all that different from what the Davos crowd worries China is doing to Hong Kong? Perhaps we missed that time Xi tried to broker a deal for an app popular with teenagers and demand a cut of the deal.
Nor would Rand, author of The Fountainhead and Atlas Shrugged, endorse tariffs on $500 billion of Chinese goods. Or Trump threatening to delist mainland companies trading in New York.
Trolling Xi’s party with sanctions – curbs that disrupted Lam’s credit card use – may feel good to Trump and Navarro, but they’re not the actions of a trusted capitalist power that prints the world’s reserve currency.
Trump is now even threatening taxes on US companies that aren’t moving jobs back home from overseas. It’s the kind of idea that might make socialist US Senator Bernie Sanders blush.
It’s also the kind of idea that the US Treasury Department would’ve criticized Thailand or Malaysia for amid the 1997-98 Asian financial crisis.
Again, it would be better if China emulated Hong Kong’s laissez-faire model in the mainland rather than risk killing the goose laying the golden economic eggs.
It’s worth remembering, though, how much compartmentalizing foreign businesspeople have done in Hong Kong, for the city’s ultra-free-economy reputation has always been odd.
Its pegged currency would be anathema to libertarian heroes like Friedrich Hayek. This also goes for its oligarchic and hyper-controlled property markets – or the fact the city’s leaders have long been picked by Beijing.
And hosting a government-backed Disney theme park raises its own questions. Hong Kong’s 2020 isn’t what the libertarian crowd may have hoped for. But its impending doom is being greatly exaggerated.