There was a grim joke China Hands used to mutter into their martinis in Hong Kong’s watering holes before the city’s return to Chinese sovereignty in 1997.
“Hong Kong is now one of the most important cities in the world,” they used to say. “Pretty soon it will be one of the most important cities in China.”
That has happened. As a segment of the Chinese economy, Shanghai overtook Hong Kong in mid-2008 and Beijing in mid-2010. Indeed, there are now many cities in China that outweigh Hong Kong in economic size, and several of them have similar if not better marketplace skills.
The question of Hong Kong’s diminishing value to the Beijing government, and what it may mean for the territory’s future as the gateway for China trade, has come into focus again with the mass demonstrations demanding political reform.
At the time of the handover and for several years after, Beijing saw Hong Kong as a jewel of great value to the Chinese economy, both for the entrepreneurial skills of its people and its predominance as a hub for foreign trades doing business with China.
So, except when they directly challenged the ultimate authority of the Chinese Communist Party, Hong Kongers have been treated leniently. Beijing has even backed away from proposals that inflamed opposition in the territory, such as implementation of anti-sedition legislation and the introduction of “patriotic” education in Hong Kong’s schools. But in the last two years since Xi Jinping took power in Beijing as China’s president and head of the Communist Party, he has been just as determined to crack down on dissent and freedom of expression in Hong Kong as elsewhere in China. Beijing’s announcement that sparked the demonstrations – that the people of Hong Kong are not to be trusted to freely elect their own head of government – is hardly a surprise.
A question now is whether Beijing’s loss of patience with Hong Kong will turn into vindictiveness. Mike Smith, the head of Australia’s ANZ bank, put it this way a few days ago: “The issue for China would be more thinking about what Hong Kong brings to them, and I think the danger to Hong Kong is that the Chinese start putting more and more emphasis on Shanghai as a financial centre, and boost things like the free trade zone, for example.”
Smith’s verdict is that the threat of being outclassed by Shanghai would arouse Hong Kong’s fundamental pragmatism, leading to a resolution with Beijing.
The reality, however, is that neither Shanghai nor any other potential financial hub in China is a threat to Hong Kong, at least not while Xi is in charge of China’s economy. Xi’s administration is not emulating Hong Kong’s advantages of the rule of law, unfettered entrepreneurship and freewheeling public debate in Shanghai, but rather is trying to ensure these virtues do not blossom anywhere in China. Beijing’s investigators are even taking special aim at foreigners by pressuring global media companies to self-censor their China products and by setting attack-trained auditors on a growing number of foreign companies operating in China.
If banks, investors and multinational companies get fed up with the tightening noose in Hong Kong, they are unlikely to up stakes and move to Shanghai, where the constraints will be much worse. They are far more likely to look elsewhere in Asia for a jurisdiction with the rule of law, freedom of expression and a high degree of administrative transparency.
The beneficiary of any further erosion of Hong Kong’s attractiveness as a hub for Asia business will not be Shanghai. It will be Singapore, which is already well established as Hong Kong’s chief regional rival.
Shanghai-Hong Kong stock program imposes tight restrictions on trading
Beijing’s tepid enthusiasm for fully opening up its markets to foreign investors is well illustrated by the Shanghai-Hong Kong Stock Connect program being trundled out this month.
The plan will for the first time allow foreign investors to directly trade shares listed on the Shanghai stock exchange, and allow mainland Chinese investors to buy and sell shares in companies listed in Hong Kong.
The scheme is part of an initiative announced earlier this year by Chinese Premier Li Keqiang to set up experimental free trade enclaves in Shanghai. This program has come under much criticism from those attempting to take part, who report that officials are unwilling to make decisions and most of the regulatory framework has not been put in place.
There are equal misgivings about the Stock Connect project, which in theory will create the second-largest equity market in the world after New York.
The daily combined two-way trade to be allowed will be capped at the equivalent of $4 billion. This represents about 20% of the combined volume of the Hong Kong and Shanghai markets.
On the Chinese side, trading is being limited to big players. A requirement that mainland Chinese investors have at least 500,000 renminbi ($91,000) in their brokerage accounts effectively excludes mom-and-pop speculators from playing the Hong Kong market.
Foreign investors will not be allowed to buy and sell Shanghai shares on the same day.
There is also uncertainty about the legal ownership of Shanghai shares purchased through the Hong Kong connection. The shares will be held by Hong Kong’s Central Clearing and Settlement System, which Beijing recognizes as owner of the shares, not the people who actually bought the shares. Whether Chinese courts would recognize the share ownership of Hong Kong investors and allow them to take action against Chinese companies remains uncertain.
Jonathan Manthorpe ([email protected]) has been an international affairs columnist for nearly 40 years.
